To make profits and buy a BMW,
it would be a good idea to, first, survive.

–N.N. Taleb

My blog got an extraordinary number of hits a day or so ago. They were directed from another blog in which the authors cited the study I referenced in my essay titled  A Reader Offers Help.

The object of the study was to refute the work of a number of bearish market analysts. The authors claimed that the bears don’t know what they are talking about because the market has not yet gone down. Pretty silly. If a fire fighter tells you that conditions in your home town are dangerously vulnerable to wildfires, do you dismiss him as a dope because there has not yet been a fire?

The heart of the problem is the confusion about the nature of market forecasts. Properly given, a market forecast should give the investor an idea about the risk vs. reward in the market, stated in terms of probabilities. If a recommendation for action is given, a stop loss should also be recommended in the event that the forecast doesn’t yield results right away.

Robert Prechter’s forecasts were cited in the study for failing to produce the market decline he forecasted. Here is a review of Prechter’s analysis and recommendations:

Since March of 2000, he has held that the market was vulnerable to collapse. His recommendation for investors has been to avoid risk by holding cash. On four occasions since 2000 Prechter recommended shorting the S&P futures for aggressive traders. The market dropped immediately after he made the recommendations. On three occasions, the market halted it’s drop prior to completing a five wave pattern indicating continuation, and started back up. In each instance, the original protective stop loss had been moved down so that the trades were closed out with no loss. The fourth trade was different: Prechter recommended a short in the fall of ’07 when the S&P was at 1537. He closed out the trade in February of ’09 at 735 for a profit of 802 points. A single contract in the S&P futures would have made $40,100. The margin posted to carry the trade would have been $5,000, yielding a return of 800% in two years.

Throughout the period, conditions in the financial markets were not unlike the situation in the Western States of the nation: high risk of conflagration. So, the call for investors was to remain in cash until the financial weather improved.

It is no surprise to me that the authors of the article damning bearish analysts are mutual fund salesmen who argue that timing the market doesn’t work and that remaining fully invested at all times is the proper strategy. The fact that so many investors complacently buy the idea is confirming of my notion that the market is topping.

I believe that the primary goal in investing is to avoid being a sucker in uncertainty. What is known is that when markets get massively overdone like today, there will be a severe bear market. The uncertainty is when. These guys are putting their customers in jeopardy at a time when conditions are as risky as they’ve ever been. It cannot end well.



No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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