By now you’re aware we had an election last week. I’ll bet you even know who won. What’s left to write? I stayed awake that night watching historical moves in futures markets. I guess when it’s caused by an election it’s an historic event. When it’s caused by less easily explained factors it’s called a crime. The “Flash Crash” was the same dramatic move. Granted it happened faster in 2010, but in the end, just like this week buying came into the market. In fact, as a technical analyst, this week’s move was very bullish on the charts.
Two years ago, I had the opportunity to work with someone new to trading. He was a 26 year old physicist. I was not the smartest one in the room. Yet here I was teaching a “quant” about technical analysis in futures markets. He commented that a six sigma move, or six standard deviations from the mean should only happen, as he put it, “…once, maybe twice, in my entire family lineage. And I’ve seen 5 of them in the last 2 weeks.” I laughed and said “Welcome to the wonderful world of commodity trading.” And isn’t that really the cause of the flash crash? Too many standard deviations, not an evil empire taking down our economic backbone or, in my opinion, not someone breaking rules that existed at the time. Maybe it’s just gravity?
So how then, do we come to some sort of explanation on the market move and the election itself? The polls were obviously wrong. The pundits were wrong. Was the ‘market’ wrong? The market was right. The market is always right. We think the market is wrong when it acts illogically but the price is merely a result of our opinions, logical or not. Usually not. The market is not a living breathing thing. The prices though are decided by living breathing things. And those living breathing things had decided Hillary was going to win and this was deemed good. Then we decided she was going to lose and this was bad, until it was good. So what gives?
If you think this is the spot where I give a great explanation of why the market moved the way it did, it’s the wrong spot. In fact, it’s the wrong blog. I don’t want to write my opinion, and that’s all it would be. Rather, I want to make an observation. The rock band The Who were wrong; we will get fooled again. Why? Because 6 sigma moves just don’t happen, except when they do. And this was the perfect example. Brexit wasn’t going to pass. The surveys told us that. The pundits told us that. Both wrong. Sensing a pattern?
When we had Friday Wraps at Bloomberg, I always asked my younger colleagues to suggest a topic whose impact we could discuss across the market sectors. But one week the pre-meeting banter, and laughter, was around the story that Donald Trump was going to run for President. Topic found. We opened that session by me suggesting everyone stop laughing. Did I think he would win I was asked. No. Did I think he could win was the next question. Again, honestly I didn’t. But I wanted everyone to understand that despite my personal opinion at the time, yes he actually could. This was not a declaration of my preferences but just my years of observation peeking out.
I’ve been surprised before and wrong way more than that. But what no longer surprises me are surprises. Six sigma moves. They happen all the time. Usually they happen when a lot of people are wrong. Or confused. Or both. And then we try to explain them. And how we won’t miss it next time. But we will. We will miss it again and again. It’s human nature. Human emotion is not the logic of math. But human emotion drives our opinions, our opinions dictate our decisions, and our decisions dictate the whether the price goes up or down; math and the accepted frequency of six sigma moves be damned.
So what happens next time? Do we learn from this and have a more ‘correct’ market opinion next time? I think we learn from all of these historic occurrences. But I think that the lesson we’ve learned twice this year, from Brexit and the US election, is that no matter how convinced you may be of an opinion, the market will find a way to remind you of the fact that the most unlikely of events are just that, unlikely. They are not impossible, they just create bigger moves. Hopefully we’ll all remember that the next time we’re “positive” of what can and can’t happen. Stop laughing.