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Wednesday
Jan112012

The Longest January I - Ken Fisher vs. Reality

I'm happy to present a new series on The Market Scoreboard titled "The Longest January". I will be going back and reviewing all of the year-end predictions that had been collected during 2011 and whose time has come. But even if I had time to put out 3 posts each week I would run out of January before I run out of stories. Hence, our January posts will probably last well into February.

We begin with investor Ken Fisher who predicted that 2011 will be a "pause that refreshes" and who was also quoted as being "... more neutral on stocks than I've been in years,". All of this happened in February of 2011 and with the benefit of almost a year gone by we can set the record straight as to this prediction. How will we go about it? By starting with this quote from Mr. Fisher: "The bears are right that there are too many bulls who became encouraged by the last two years' rise,".

From February of 2009 up to when the article was published the S&P 500 rose from the vicinity of 800 to about 1,300, a 62% increase. With the benefit of a graph we can also see that the rise can be modeled linearly with some success.

Next is the period between February of 2011 leading up to today. What we see there is quite different. The market, as measured by the S&P 500 started off above 1,300 and after a shifting down around August, remains somewhere above 1,200. We can instinctively see the difference, but we can also use the same linear regression model as in the previous graph and see that this new graph cannot be successfully modeled in the same way as a linear increase. In this case, we cannot even reliably model this period's values as a linear progression of any kind.

Conclusion: By applying common sense, and backing it up with just a little bit of math, we arrive at the conclusion that Mr. Fisher seems to have been right in his prediction; The rise in S&P 500 values preceding his February 2011 prediction did not continue throughout the rest of 2011.

Post Script: I would like to stress that in including linear regression I am in no way giving a nod to what is sometimes called "technical analysis" of the stock market. Linear regression is a simple mathematical tool. You will find linear regression at the very heart of scientific endeavor across all fields, from studying experimental results down to calibrating equipment. I am no fan of those who dress up their attempts to tell the future with fancy graphs and techno-babble; replace your tea leaves with an impressive looking graph and you will be no closer to reality.

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