Ignore All Forecasters

The Kelly Letter Excerpt
The following is from this year’s Note 17 of The Kelly Letter, which went out to subscribers last Sunday morning.

Two weeks ago in this space, we got a kick out of Dennis Gartman of the Gartman Letter saying on “Fast Money” that he became scared ahead of what he saw being a “long-awaited and much-needed correction.” He even pinpointed the market’s flip from bullish to bearish to a 15-minute window on the morning of Friday, April 4. “I’m not sure what happened, but something happened between 11 and 11:15, that everything turned on a dime,” he said, and mentioned that he was hunkering down in cash and gold.

The irritating thing about 15-minute increments of game-changing magnitude is that they come up so darned often, Gartman has discovered. With his particular brand of prognostication, the world can change four times an hour, thus 96 times per day. At this frequency, the longevity of a Gartman forecast based on a previous 15-minute revelation is not ample. Along with mayfly lifespans, eclipses, and the rapt attention of voters, Gartman forecasts appear on the list of things to enjoy quickly before they’re gone. While it lasts, then, you’ll be pleased to know he’s bullish once more.

He advised in his newsletter that it’s time to be a buyer of equities “generally,” describing his portfolio as being “pleasantly long” stocks. What did it for him? Mainly the market’s refusal to go down as he warned it would. He didn’t describe it that way, of course. He said it was the market’s ability to bounce off strong support. He said that “after a good two weeks’ decline, after 50 big handles in the S&P, after barely going through but holding the 100-day moving average, you have to understand: it’s still a bull market. So it’s back to being pleasantly long again.” He advised that if his letter changes again soon — and why not? — it would be to “increase exposure to equities rather than to decrease it.” Another 15-minute epiphany could do the trick.

A convenient aspect of advice like Gartman’s is that you never have to worry about missing something he says. Just wait. Fairly quickly, he’ll come around to aligning his forecast with whatever posture your money’s in. Worried, and hiding in cash? No problem, Gartman will suggest it soon. Aggressive and buying hand over fist? He’ll get there before you know it. We could even automate Gartman’s appearances on CNBC with a simple algorithm. If the market goes down, the Gart-voice warns of going down more. If it goes up, the Gart-voice says it has further to run. Just plug in the Chatty Garty and fill the air time.

Gartman’s recent instability serves as proxy for something bigger at work, which is the desire of z-vals (zero-validity forecasters) everywhere to ring the bell at the top of the market. In fact, most major market tops are a process rather than an event. They generally take longer than, say, 15 minutes, to fully form. They take months and involve lots of to-and-fro, chartist chatter about confirmations and non-confirmations and divergences, and bouts of relief in the wake of quick scares.

Those on the lookout for a sea change in the market’s direction are paying close attention to how the Nasdaq and Russell 2000 broke their recent uptrend channels. They represent technology and small-caps, of course, and small-caps power our growth vehicle in Tier 1. Market watchers think small companies lead the market, so pay special attention to the Russell. When the broad market, defined as the S&P 500, never broke support after warnings from Gartman et al., analysts turned attention to the Nasdaq and Russell. They did break support, but then bounced back. The new area to watch is the overhead resistance on these two indexes.

Specifically, chartists advise that we’ll know the bull market is still kicking if the Nasdaq 100 can clear 3600 and the Russell 2000 overcomes 1190. They closed Friday at 3533 and 1123 respectively, meaning that a green light on further market gains lies another 2 pct gain away on the Nasdaq 100 and another 6 pct away on the Russell 2000. In a different manner, much more studious and believable, these wise oracles of the moving lines tell us the same thing Gartman tells us: we’ll know the market is moving higher if it moves higher, and should beware a move lower if it moves lower.

They do it with a straight face, though. Here’s Mark Arbeter of S&P Capital IQ, from his Friday note: “Selling pressure from these levels, resulting in a failure of the leading indices to sustain any new highs, would be a bearish signal and could create the type of divergence and non-confirmation that is often seen at market tops.” He clarified that the scenario is built on “a lot of ‘ifs'” so his firm intends to “remain prepared to identify and take action given a multitude of potential paths the markets could take. This scenario is one that we feel merits consideration, discussion, and ultimately preparation [in case] things begin to unfold in this manner.”

Let me remind you that the market can only go in three directions: up, sideways, or down. That’s it. Since the z-vals are just guessing, anyway, why would any of the three merit more consideration than the others? Why should any market forecast merit any consideration at all? We can’t know which of the three directions will unfold next, nor for how long, so all we can do is wait and react. Given this, the energy of consideration should be reserved for arenas in life where it matters, like choosing a place to work or planning a family vacation. These are worth researching. Future market direction? Not really.

Yours truly,
Jason Kelly
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  1. Jeff
    Posted May 1, 2014 at 10:04 am | Permalink

    I very rarely respond to any but how you put it to words was awesome. It’s too easy to get caught in drama, remember family is #1 .

    Thanks Jason! I learn alot from your books and newsletters.

  2. Tekin
    Posted April 30, 2014 at 2:28 am | Permalink

    What a refreshing commentary! And it rings so true. It’s all just self-promotion. If you call a top a hundred times a month, eventually you’re going to get it right. But it’s actually meaningless because trading is just a game of probabilities within defined time frames. When you have money at stake, it doesn’t matter if you’re right eventually because long before that you could be completely wiped out if you’re not using some kind of money management system. I don’t care about being right–that’s just for losers and people who have something to peddle–I only care about building my business by making money.

  3. Wells Wagner
    Posted April 30, 2014 at 12:55 am | Permalink

    Great comments. Being mostly a dividend taker, I don’t worry about the day to day market any more. All the hype to buy all those goodie stocks are a real turnoff and throw away messages. Just check on stocks occaisionaly and make sure there still is a company there and their specs are good and wait out the ups, downs, and sideways.

  4. Posted April 29, 2014 at 11:22 pm | Permalink

    Love the attitude. Thanks for the morning smile!

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