By: specoletta on Mercoledì 29 Maggio 2013 12:46
.. Per chi ha voglia questo e' un ottimo articolo molto obiettivo sintetico e lucido..
http://advisorperspectives.com/dshort/guest/Lance-Roberts-130528-Evaluating-3-Bullish-Arguments.php
Io mi soffermo su questo aspetto matematico statistico..
The Federal Reserve bond purchases are like a pool of water with only one outlet. The only place for the liquidity to flow is into the equity markets. If you are an adept trader there is likely some money left to be made. However, if you aren't, you will likely wind up losing a large chunk of your principal balance when prices revert.
The market is currently at extensions that are usually only seen at major market peaks as I discussed recently:
"Market prices are subject to gravity (the long term moving average) and the longer the duration of the moving average the greater the 'gravitational pull' that exists. One way to measure extremes of price movement is through the use of standard deviation. One standard deviation from the mean (average) encompasses 68.2% of potential outcomes within a given distribution of data which, in this case, are market prices. Two standard deviations encompass 95.8% of all potential outcomes while three standard deviations encompass 99.8% of all potential outcomes."
The chart below shows a weekly chart, which is a very slow moving analysis, of the S&P 500 overlaid with Bollinger Bands which represent 3 standard deviations of a very long term (50 Week)) moving average.
Click for a larger image
"At the peaks of the 'Internet Bubble' and the 'Credit/Housing Bubble' the market never got significantly above 2-standard deviations. Today, we are encroaching well into 3-standard deviation territory. Standard deviation analysis tells us that roughly 99% of the potential movement in prices, from the bottom of the correction in 2011, has been achieved. Furthermore, the extension of the market above the long term moving average is also at levels that have previously been associated with major market tops."
The current level of overbought conditions, combined with extreme complacency, in the market leave unwitting investors in danger of a more severe correction than currently anticipated. A correction to the long term moving average (currently around 1465) would entail an 12.06% correction. A correction to 3-standard deviations below the long term moving average (which is most common within a mean reversion process) would slap investors with 20.1% loss.
If you don't think a 20% loss is possible all you have to do is look back to the summer of 2011 when the "Debt Ceiling Debate" sent investors running for cover under the threat of a government bond default. (Oh, and by the way, that same debate is rapidly approaching in the next month or so.)
There is virtually no "bullish" argument that will withstand real scrutiny. Yield analysis is flawed because of the artificial interest rate suppression. It is the same for equity risk premium analysis which is the subject of an upcoming post. However, because the optimistic analysis supports the underlying psychological greed - all real scrutiny that would reveal evidence to contrary is dismissed. However, it is "willful blindness" that eventually leads to a dislocation in the markets.
Disclosure: It is important to understand that just because I am pointing out potential risks in the market that we currently remain invested in it. However, we are invested with hedges in place along with very tight loss limits. When the current "exuberant" trend ceases to exist so will our participation in the market.
As stated above, this is a dangerous market as the current extension is only seen at major market peaks; however, such extensions can go further, and for longer, than you can imagine. The problem with markets, such as these, are that they resemble a game of "musical chairs." Unfortunately, the major market players will already be seated before the music stops, leaving the average investor out of the game.