The Big Picture

“Life is like a sine wave, you have to go through many ups and downs in order to move forward.”

I would surmise there are many things to which we can apply that bit of wisdom. Ups and downs in the financial markets? Say it ain’t so!

I promise I am not going to “geek-out” too much with mathematical discussion today. It may surprise some to learn there are similarities of mathematical functions to patterns we observe in the markets. While there are academic theories that propose markets are entirely random; we do tend to see repeating patterns that challenge those propositions.

An amplitude-damping sine wave.

A few weeks ago I discussed that this correction, like many before it, is following a similar pattern to past corrections. If markets are entirely random, how can that be the case? Of course corrections are caused by different circumstances. However the general pattern of many corrections are fairly homologous.

Have a Plan and a Process!

From the Trenches

“I don’t trust words, I even question actions, but I never doubt patterns.”

Visual observations are very powerful. They tell a different story than words and numbers. We do witness repeating patterns in the markets from time to time. This however does not imply markets are predictable. Does the below chart of the S&P 500 look like a damping sine wave? If it looks like a duck…

S&P 500 Jan. 1, 2018 through Mar. 8, 2018

I suppose some may be thinking why and how? Markets are supposed to be random right? There are a handful a reasons we may propose why we see market patterns repeat. A primary reason is markets are mean-reverting; which means prices tend to move back to an average price over time. A damping sine wave demonstrates this function.

I would propose that one of the strongest arguments for market patterns is the human element. Times change, data changes, innovations are introduced. However, human behavior predominantly stays the same.

Bottom line: While the conditions of the markets are constantly fluctuating, human behavior remains fairly constant.

The Weeds

“We have three confirmations, the crystal ball, the magic 8-ball, and the coin flip, they all say to buy!” -Dave Carpenter

A little humor.

I know that some approach the markets like a casino. Believing it is all blind luck. Stocks up, stocks down, who knows?! Which way is the wind blowing. The media does not exactly do a good job of reporting the financial markets in a sensible manner. Through this corrective process, we went from deep pessimistic lows to euphoric highs. For the most part all dependent on whether the market was up or down on that particular day. Does this seem like solid and rational financial analysis? Not even close. I view it as a cross between a daytime drama and a clown show.

-Michael Ramirez Cartoon

While I can acknowledge that at times the markets can be wild and unnerving, there is a method to the madness.

Bottom Line: As for the “manic-media”, you would be serving yourself much better by changing the channel.