Dusting Off Old Habits

I have a very cloudy crystal ball.
The cloudiness is internal and is just reflective of my own degrading and poorly capable neural mechanisms. It just doesn’t know how to deal with data and apply appropriate weightings to streaming information. It also seems to be incapable of consistently recognizing when patterns are likely to reverse.
My crystal ball is also in need of dusting as lots of extraneous factors get in the way of rationally approaching the prediction business. Some of those external factors may be personal baggage, while others just represent the irrational world as it attempts to interpret facts and rumors.
Anyway, my crystal ball is in constant need of dusting.
So I don’t begin to believe that I know what’s going to happen by even the next keystroke. I’m envious of all of those that regularly appear on TV and are able to forecast the future.
I’m especially envious of those that don’t care about the eventual outcome of predictions and who don’t believe in the concept of “report cards.” You can either look at predictions as being purely of entertainment value or as a guide for how to live your life.
I don’t see them in either of those ways.
In a perfectly ordered world simple mathematical principles should help to explain all events; past, present and future.
Maybe that’s the way it is on our newly discovered twin planet, Kepler 22b, the one that they’re calling “super earth,” but it sure isn’t that way here.
Yet mathemeticians, statisticians and physicists are widely sought after by financial firms who clearly believe that the market continues to be a rational place that can be dissected into a collection of equations that cascade with great predictability.
Given that the little guy doesn’t move the needle very much, I can only believe that in a zero sum game the big winners of the day are very similar to the big losers of that same day, in that both place great reliance on high priced objective tools that are used to predict the behavior of a rational market.
I can also surmise that those that win on one day are every bit as likely to lose on the next, as is the opposite true.
Otherwise, we would see the extinction of those that are in the habit of losing and then it would no longer be a zero sum game.
It would be a Charlie Sheen like universe with only winners prowling the markets.
As result, the only logical explanation can be that the crystal ball used by the big boys is every bit as cloudy, but is more capable of moving the needle.
Presumably, trading algorithms can only suffer from cloudiness of design, rather than being subject to dustty conditions, so they have me at an advantage.
The one thing my crystal ball has been good at has been to realize that computer storage media will evolve, leaving older prehistoric forms worthless as the hardware necessary to read the media of yesterday all become extinct.
So before the inevitable would happen I always transferred my files to the latest generation of storage. My old 5 1/4′ floppies gave way to 3 1/2″ less floppy disks, which in turn gave way to CD, then to DVD and then to various USB ported external devices. To my credit, I also foresaw the need to skip the Blu-Ray option.
The other day, while cleaning out a closet in preparation for Phase 2 of our re-carpet process, I discovered a long ago forgotten PC in a closet. It was a tremendously heavy first generation Pentium processor with a 1 gigabyte hard drive and no USB ports.
I remember thinking just how “kick ass” that sweet gig of storage was going to be.
And it was until the world invented music and photos.
In the time before there was art of any sort that computer was all that anyone could have ever needed.
I didn’t dust off that computer, but I did dust off an old statistical analysis program that I used to use back in the days when I actually did “research” and back when my existence may have offered “added value.”
I thought that perhaps a methodoligical approach to data could help my crystal ball see just a bit more clearly.
Luckily, I’d saved the installation disks, which had come on those 3 1/2” floppies onto a CD, in anticipation of the death of the floppy. I even knew where to find that CD, although I hadn’t used the program in about 10 years.
What prompted the need to dust that statistics package off was the desire to see whether there was any correlation between Friday and Monday market closes over the past 6 months.
My semi-casual observation indicated that there was some kind of an association, but I needed more confirmation.
Obviously, the very thought that I would uncover some previously undiscoverd correlation was delusional, as if all of the highly compensated people designing prediction models hadn’t already looked at every single possible relationship imagineable. I mean if someone has looked at variables such as Original conference of Super Bowl winner in a leap year, then days of the week had to be a given.
It’s just that no one ever told me.
Increasingly, it had empirically seemed to me that we were seeing large moves on Fridays which especially puzzled me if those large moves were to the positive side.
WIth all of the uncertainty these days, whatever happened the the adage of not wanting to be long stocks over the weekend?
Take this past Friday, for example. The market ended up just shy of 200 points.
In fact, we’ve seen 13 triple digit moves on Fridays over the past 31 weeks. 7 of those have been upward moves. Since George Bush declared that he had won a mandate in 2000 with less than 50% of the popular vote, I suppose that you could be justified in saying that 7 out of 13 represented a mandate of some sort.
But as it turned out, no matter how I sliced, diced and transformed the data, the chances of having a big move on Friday is not likely to predicate anything for the coming Monday. What is not likely to happen, though, is seeing a triple digit upward move on Friday followed by an equal move on Monday.
In fact, of the 16 triple digit moves on Monday, only 5 had been preceded by a triple digit Friday.
Too bad.
As the final week of the December options cycle comes to an end, I only need toi replace shares of Green Mountain Coffee Roasters and Netflix, due to assignment.
That means that everything else could benefit from a nice rise on Monday.
What I can predict is that on weeks that I suffer lots of assignments I love seeing Mondays open in a decidedly negative direction so that I could use the newly available cash to pick up bargains.
I can also predict that on those weeks that I don’t have much cash to reinvest I love seeing a strong jump out of the box so that I can sell optins into the strength.
I suppose that represents an algorithm of some sort. I may have to give myself a nice Christmas bonus for that one.
After dusting off the statistics program and evaluating the past 31 weeks of Friday and Monday closing data, creating subsets of triple digit moves on either of those days and then looking at absolute values, as well, I came to the conclusion that nothing really mattered.
“The trend is your friend” has given way to “MoMo” stocks that could just as easily become your worst enemy as your friend.
With all of the talk last week of a stock market melt up, coming fresh off the heels of the same people who the previous week had characterized the market’s move as reflecting a “dead cat bounce,” my inartful analyis says that there’s very little reason to believe that any melt up will happen on Monday.
If I’m wrong, I can always go back to my old profession and at least put that duster to the use for which it was intended.