By Broyhill Asset Management
In our last post, The Cost of Comfort, we suggested investors should hold their noses and put some cash to work. Markets have tended to rally from oversold conditions provoked by external shocks. Britain’s vote to leave the EU was a shock to most market participants who responded in typical fashion – panic.
The bigger surprise, however, was how quick markets came roaring back. We put some cash to work. But outside of Europe and the financial sector, the sell-off in global markets was minor; and hardly significant enough to generate absolute value. We will have to wait to deploy more cash.
Until then, many investors will be tempted to “watch the tape” for any hint which confirms their current positioning. Even value investors get caught staring at charts for answers during periods of panic. As such, a few reminders from The Devil’s Financial Dictionary may come in handy for the next crisis:
FLIGHT TO SAFETY, n. A mass movement among investors that typically occurs almost immediately after a flight of fancy. Having deluded themselves into thinking that risk had been repealed, investors now scurry to dump the dangerous junk they recently bought and to replace it with safer assets like US Treasury debt. Flights to safety typically hit the runway after most of the risk has already been expelled from the market.
CORRECTION, n. A moderate decline in the market that the people who think they have recognized it believe will not last much longer. It could, however, turn out to be the beginning of a full-blown BEAR MARKET, nothing but a DIP, or the beginning of a BULL MARKET. Only after it is over will anyone know for certain what it was. Investors should note the connotation implicit in the term: that something about the market’s behavior needed to be “corrected,” as if it were somehow inherently wrong for prices to be rising.
BOTTOM, n. and v. As Thoreau wrote in Walden, “There is a solid bottom everywhere. We read that the traveller asked the boy if the swamp before him had a hard bottom. The boy replied that it had. But presently the traveller’s horse sank in up to the girths, and he observed to the boy, ‘I thought you said that this bog had a hard bottom.’ ‘So it has,’ answered the latter, ‘but you have not got half way to it yet.’” And investing is no different today. A market is said by TECHNICAL ANALYSTs to be “forming a bottom” when prices appear to be stabilizing after a period of falling. It is said to be “completing a bottom” when prices begin to rise. If prices then fall instead, technical analysts will simply declare that now the market is forming another bottom. New bottoms can be formed repeatedly—all the way down to zero, in fact. See also SUPPORT.
SUPPORT, n. In TECHNICAL ANALYSIS, a pattern in which the current price of an asset approaches its past low price. Even though the prices of all financial assets experience sharp and frequent declines, technical analysts believe that approaching a “support level” somehow ensures that the price is unlikely to continue going down, at least in the short term—a period of time that the technical analyst will redefine as soon as it isn’t met. See BOTTOM; RESISTANCE. The wisest investors know that the only price that is a true support level for any financial asset is zero.
TECHNICAL ANALYSIS; TECHNICAL ANALYST, n. A method of predicting the future prices of a financial asset by looking at its past prices, which is about as reliable as attempting to forecast tomorrow’s weather by studying yesterday’s. There is some evidence that technical analysis may have a weak ability to predict momentary fluctuations in price for some assets, particularly commodities and currencies. But it is unclear whether technical analysis can work over longer investing horizons. After all, the future prices of stocks and other securities are determined by the flows of cash generated by the underlying assets, not by the past prices of the securities themselves—just as the future records of sports teams are determined by how well the players perform, not by the scores of the games they played in the past. Because the prices of securities move in an almost infinite range of patterns, no endeavor in the financial world is more encrusted with arcane jargon than technical analysis, including the HINDENBURG OMEN, Fibonacci retracements, Ichimoku clouds, vortex indicators, stochastic oscillators, triple exponential moving averages, guppy multiple moving averages, SAUCERs, stick sandwiches, double tops, triple bottoms, tweezer bottoms, HEAD AND SHOULDERS, the long-legged Doji, bearish catapults, bullish abandoned babies, the death cross, and the “upside gap two crows” pattern. It is a good general rule on Wall Street that the more impenetrable the jargon is, the less likely the thing described by it is to be profitable.
TRENDLINE, n. A diagonal drawn by TECHNICAL ANALYSTs, who believe it shows not only where a security’s price has been but where it is going. If it ends up going somewhere else, technical analysts will draw a new trendline. It is no surprise, then, that keeping their charts up-to-date keeps technical analysts extremely busy.
TREND-FOLLOWING, v. The attempt to make money from TRENDs by following them. If you could reliably identify trends, wouldn’t you be much better off anticipating them than following them? Yet the term “trend-anticipating” doesn’t appear to exist in the Wall Street lexicon. Perhaps that should tell you something.
MARKET TIMING, n. The attempt to avoid losing money in BEAR MARKETs; the most common result, however, is to avoid making money in BULL MARKETs.
TACTICAL ASSET ALLOCATION, n. A way of describing “MARKET TIMING” with nine syllables instead of four, making it sound nearly two and a half times more impressive. That does not, however, make it any more likely to be successful.
LONG-TERM, adj. On Wall Street, a phrase used to describe a period that begins approximately thirty seconds from now and ends, at most, a few weeks from now.
VISIBILITY, n. Purported insight into or confidence about a company’s future earnings, usually seen only by looking into a rearview mirror. Visibility, intended as a synonym for predictability, is in fact a synonym for self-delusion. There are no times when the future is more or less visible; it is always invisible.
Good luck out there to all you Closet Technicians.