Wednesday, December 03, 2008

BusinessWeek and the Guillotine

Amy Feldman, an associate editor of BusinessWeek recently wrote an article presenting and explaining an interview with Tim Hayes of Ned Davis Research which claims, among other things, that we are in a secular bear market which started in 2000. The timing of this discovery makes me suspicious. It is not hard to yell 'bear market since 2000' in December, 2008, when we all know that the total ROI since then has been, very roughly, -30%, and when many, many others are yelling the same slogan. But people say that the test of a scientific theory - and Feldman/Hayes are of course presenting themselves as being very scientific - is in its predictive value. Where was Mr. Hayes, let's say, at the beginning of 2006, when the world looked so rosy to so many?

That isn't the only thing which bothers me about the article. It ends by saying "The median cyclical bull within a secular bear is a rise of 55%. There have been 18 cases of this. So we are pretty hopeful about the next six to nine months." But if you read the article, you will discover that it includes not even the slightest hint as to when the next cyclical-bull-in-a-secular-bear will start, which would be the necessary logical connection between the third sentence quoted here and the two before that.

And how about what seems to be the theoretical background of the interview? "Tim Hayes looked at the four secular bear markets since 1900... and has defined 18 cyclical bull markets that took shape within them." In other words, he has discovered that the behavior of the stock market surrogates can be seen as the superposition of oscillations of different periods. Didn't Joseph Fourier say pretty much the same thing in the early 1800s? And didn't he suggest that the same description applies to so many natural phenomena as to make it almost useless as a distinguishing characteristic?


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