The Market is a Chaotic Manifestation of a Chaotic World - But People Are Pattern Recognizers
Was that really the face of the Virgin Mary on the billboard?? What an interesting thought, given that we would have no way of knowing what she looked like. But people see it there, because our brains work as pattern recognizers. That is how we make sense of the world, by looking for patterns. And we will find a pattern, whether or not there is an actual pattern to be found. And so we find commentators noting the shape of the curves of the S&P 500, comparing it with past shapes, and stating that we will "test the bottom" again. But studies have shown that there is no correlation between market moves over time. So this method of analysis, looking at the market movements and trying to glean significance in processes like bottom formation will work very well, unless it doesn't. And if it does not work, we will just forget all about, and we will try to perceive significance in the future patterns. It's enough to give market analysis a bad name.
So, should we not try?? Sure we should. But I say, let us broaden our view. Let us break from the pattern recognition mindset, and embrace a broader and more liberal view of reality. The market does not exist in a vacuum. It is a chaotic manifestation of a chaotic world.
I don't know if this exhibit still exists at the Exploratorium in San Francisco, but there was a wonderful, wonderful exhibit on chaos. The exhibit designers found marvelously clever ways to construct chaotic systems. One was a tube, about 4 feet long filled with water and sand and vertically rotatable. After the sand had settle at one end of the tube, it could be rotated so that the sand-filled end was higher, and the sand would spill through the water to the other end, forming a million small patterns on its way. The movement of the sand on its way down was completely unpredictable and chaotic, except for the fact that it would all reach the other end eventually. In many respects the stock market is the same way. The small day to day movements are entirely unpredictable, but in broad scope, there are forces that move the market. To understand those forces we must broaden our view, and not try to analyze and predict the stock market based on the stock market alone. The stock market is profoundly influenced by the political world. It is foolish to talk about bottom formation when there are huge political changes taking place. We should look at the broad picture, to include politics here and abroad. When we do, we see that there is a strong push to stimulate the economy. This will make a huge, huge difference. I don't think we will test that bottom. Based on the political scene, I think the bottom is made. I won't try to predict what will happen tomorrow. But I do believe that we are on an uptrend that could, at some point between now and March, take off in a pretty powerful rally.