What Just Happened?

SPX 2017

A year ago I wrote about a “reset.” The idea that the New Year was the time to move forward with trading and investing, since the previous year had ended and you had closed the book on your P&L for the year. As we assessed our successes and failures and moved on from those, we should simply do the same with our profits and losses. I do realize this isn’t always easy, but hopefully people found some sense of moving on at the turn of the year and entered 2017 with a clear head, open to what the markets might hold. And a clear head was definitely needed. It is pretty much every year for one reason or another, but it’s always fun to explore that year’s reason.

To me, one of the largest surprises in the markets this year (aside from crypto-currencies, of course) was the ability of the S&P 500 to march forward, month after month, with barely a stumble. While there was not a point at which I came out and said “This is the top,” many others did. This doesn’t make me any smarter, I just didn’t get any “it’s over” signals and I can only surmise that others did. It also doesn’t make my work any better than theirs over time, necessarily. What it does show is that we use different measures and techniques.

I have always made it my practice to try not to pick tops or bottoms. I wait for a market to show a weakness on my charts that communicate to me that the overall trend in one direction is indeed reversing, or at least no longer continuing. The broad equity market never really showed that. The fact that it had some periods of going down in its march upward is of course unavoidable. But the degree of these sell-offs and the length of time they lasted, or didn’t as the case may be, didn’t tell me that it was time to change my overall thinking.

Don’t get me wrong. I kept looking for that reason. I’ve been as amazed as most at the strength, resilience, and longevity of this Bull Run. But that doesn’t mean that I’m going to let that get in the way of analysis, and conclusions that are based on that analysis. I could have easily been wrong. My indicators and techniques might have shown no sign of the crack until it was too late. And a great deal of others would have been right. Though ‘right’ is generally a relative term. If you called for the end of the bull market in February and it ended in November, would you have been right? No, but you might have claimed bragging rights anyway.

None of us are right all the time. No matter the technique, no matter the belief in what is important in the big picture, the best analysts have made wrong calls. And the best of those will quickly tell you about them. Oftentimes, it’s a case of them saying that something had never happened before. I’ve said that plenty. Kind of the point. Remember, nothing has happened before…until it happens. And then it has. And no matter your technique, you may account for all of history but you can never account for all of the future.

So what’s the point? Well, it’s pretty simple. It’s about the odds. I’ve often told people that I think a good bookie would be a great trader. They get the numbers. And they’re disciplined (that’s why I said a good bookie). Their business, and that of a trader, investor or portfolio manager is simply to maximize the odds as best they can. Like a casino, but better. A casino knows that an experienced gambler at a craps table can almost get even odds by playing the table right. Almost. I watched my grandfather do it. And that’s ok. As long as the odds are in the house’s favor, they will still win in the long run.

Flipping coins. We all know this one. Flip it enough, it’s 50% heads and 50% tails. But you may go broke if you’re betting on it when it comes up 10 tails in a row. So understanding the odds, and then making your decisions is the only way to proceed. The odds of the S&P having the run it did this year are pretty slim in the overall picture. History says so. We all thought so. But it went up all year anyway.

The thing we need to remember about all those professionals (and amateurs) that were wrong this year is that their decisions, or at least opinions, were based on the odds of the index continuing higher based on their analysis. People called for the end with varying degrees of conviction, but no one guaranteed it. At least no one you should spend time listening to. That’s the key to longevity doing this. No one has a foolproof technique. No one has seen it all. We’ve gone through discussing six sigma moves happening with regularity, bubbles that are actually more prevalent than we want to believe, and all of the amazing things that can catch us off guard.

It’s a lot like the old saying, “When you least expect it, expect it.” If something’s never happened before, be on the lookout for it happening this time. Use your best techniques to maximize the odds in your favor. And always be on the lookout for 10 tails in a row. Because few of us saw this coming in 2017. For varying reasons, most at some point looked for at least a larger correction than we got. Why? Because we’d never really seen anything like this before. Now we have. But here comes 2018. And its own surprises. To quote The Hunger Games, a movie I took my daughter to when she was younger, “May the Odds Be Ever In Your Favor.” If that doesn’t work, “May the Force Be With You.” And as a last resort, flip the coin again. If your analysis is at all decent, it really will come up heads soon.

Wishing all a Healthy, Happy, and Prosperous New Year!