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  • superbmindset superbmindset Apr 8, 2010 11:11 PM Flag

    Jiggles and Wiggles

    I’ve been watching Carter Worth’s illusions of order for some time....

    I just can’t see how investors can believe that a stock's past price history holds the key and a vital set of clues to its future price performance. I mean, how can the future price of a stock be ascertained by charting price movements (or jiggles and wiggles as I call them) of the past?

    I am not just making fun of Carter here....the fact that most, if not all, self-respecting brokerage research houses have their technical analysis division... suggests that it is mainstream. But the problem is that it has become “too” has captured the attention of too many do-it-yourself-investors...which now also try to make predictions by charting.

    The irony here is that chartists are becoming more and more successful in their predictions due to the fact that more people follow the same set of jiggles and wiggles. The danger lies in that it is becoming a self-fulfilling prophecy: enough people use this tool and it ultimately influences the price that it is attempting to predict in the first place. And the never-ending cycle investors overweight technical analysis and underweight fundamentals...

    Eventually....these sets of cryptic jiggles and wiggles might all signal a sharp drop (it can also signal a price rise but the danger lies in the opposite direction)....we might end up with an S&P at 600 again for no fundamental reasons. As chartists do not look at underlying reasons, just utilize herd-like mentality to be successful at what they do....

    I just don’t understand how the media is reinforcing this and makes it look more solid and portentous than it really is....

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    • Wow, what a coincidence! When the market last Thursday moved below the 50 day moving average, the S&P 500 broke down....only to find support at exactly the 200 day moving average...and subsequently moved back up to the 50 day moving average! I don't have an expensive charting tool system, I just used Google Finance. I brought up the S&P 500 chart, clicked technicals and voila!

      Brian Belski on Bloomberg last week: "the markets are driven by fundamentals period...period."

      I beg to differ! As I mentioned a month ago: since the new forces driving market prices today are "jiggles and wiggles"...the dangers of a sharp drop are very real...

      ...and for as long as investors follow Carter instead of might potentially lead to an even sharper drop in prices....we might even test last year's lows....

      • 1 Reply to superbmindset
      • More on Carter Worth, May 20, 2010: “We spend a lot of time trying to pay attention to symmetry and there are rules of symmetry if you will, borrow from some of the rules of physics. There's a pretty time-tested rule that one can rely on for determining bear or bull -- a 200-year old rule and it is the character of slope of the smoothing mechanism, the 150-day moving average. So currency, commodity, index, stock, what have you, if the smoothing mechanism is rising, the instrument in question is bullish. If it's declining, the instrument in question is bearish. What's happened now for the first time in over a year, the smoothing mechanism on the S&P 500 is now no longer rising “

        OK, so I am not going to question the rules of symmetry since they are borrowed from physics! And I am also not going to question the character of slope of the smoothing mechanism since it’s a 200-year old rule!

        But I am going to question which index he relies on for determining bear or bull market:

        The S&P 500 Index that Carter uses to determine if we are in a bear or bull market is capitalization-weighted, it’s not an equally weighted index. This is not truly representative.

        For example, if you take a company like Apple which has a $225 Billion market cap, that company’s performance will have a much greater impact on the performance of the S&P 500 Index than a smaller large cap company like Massey Energy Company which has a market cap of $2.6 Billion…the impact of Apple is about 87 times larger than the impact of Massey Energy Company on influencing the performance of the S&P 500 index, when you take into account "capitalization-weighted."

        The same mistake is made by investment managers who compare their returns to that of the capitalization-weighted index rather than the equal weighted index. If you were the manager doing active management, I guess that you would build your portfolio based on what you think about the future performance of the company, not on the market capitalization. But the manager still utilizes the wrong benchmark index….i.e. a large cap manager with a YTD return of down 1.0% has outperformed the capitalization-weighted S&P 500 (down 3.7%) but underperformed the equal weighted index (down 0.06%)!

        So, even if we believe this smoothing mechanism can determine if we are in a bull or bear market, we still need to choose a truly representative index....

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