It is also the point I was making in Friday's "Equities: This Is The Worst Excuse for a Stock Bubble I've Ever Seen (and why we'll be buying Monday)":
The major indices are lower than they were seven months ago, what kind of feeble bubble is that?From Statistical Ideas:
One of the lessons of watching way too many upticks and downticks over the decades is that the big "Whoa, what's that" action tend to be countertrend to the underlying moves. Not always, October 19, 1987 comes to mind, but often enough to be a decent rule of thumb.
In a down trending market the countertrends are violent upmoves that occur when shorts collectively cover, usually before reestablishing the short. The opposite is true for upmoves. The violent countertrends are to the downside and in fact can be a confirmation that the market is actually trending up....MORE
Waiting to be right
The market has had a recent hiccup, and now there is a choir of professionals who state that we could -or could not- be in for the start of a larger correction (e.g., 10% or so). Of course if anyone knew this in advance for sure (even just once in their adult working life), then he or she would soon find themselves doing something else more interesting than constantly putting out correction counsel to anyone willing to listen.
In risk theory we see evidence of these want-to-be crystal gazers, as they leave in their wake a streak of Type 1 errors. How can you blame them either, as whenever the market falls 1%-2% in a day, then clearly someone should have known.
Let's say that a 10% -or greater- correction occurs maybe once or twice a year (that's being generous.) Meanwhile a daily market drop of 1%-2% occurs about 20 times a year. If we allow all of these daily 1%-2% market drops to always cue us in on a broader 10% correction, which when it occurs only includes a handful of the 1%-2% daily drops, then more than 3/4 of these broader market correction guesses would be wrong. Those are horrible odds to bet with, and not worthy of thinking twice about. This is also an idea known as a false positive, in the sphere of biostatistics testing. Of course one can also often be right for the wrong reasons, though we save this for another note. Meanwhile, these daily drops of 1%-2% should just be considered oddities, and nothing more. They are typically not "signals" of something more significant, outside of normal market gyrations, within a longer-term up-trend....MUCH MORE
