First, Fabijo – your Monkey experiment is fantastic. This thread has dipped deeply into the heart of what we are doing here. I want to wrap it up – kind of a Jerry Springer – final thought
. It is not my intention to end this thread if anyone cares to respond. Some of what has come out of this discussion with Desperado, suggest a discussion of long term trends is probably warranted. The key to understanding long term trends requires an understanding of logarithmic scales versus linear scales.
The charts show the S&P500 from 1950 to the present. The top chart is a logarithmic scale, the bottom chart is a linear scale. They show the exact same data and the red trend lines are the same line. The key difference is the y-axis (price data). Spacing on a logarithmic scale (the straight trend line) is not coincidental, it’s purpose is to present the data in a format that eliminates the effects of inflation. The effects of inflation are not readily apparent when you view a two or three year chart. However, it is extremely significant when you begin to view the market from a historical perspective. The linear axis chart (the one with the curved trend line) does not reveal any of the great market growth periods of the 50’s and 80’s or the declines of the 70’s. However, the logarithmic chart does reveal those changes and allows for comparison. For example, the growth from 1953 to 1956 rivaled the great growth boom of the late 90’s. What is very significant, is that the growth of the 50’s was sustainable, compared to the speculative mass hysteria of the late 90’s (In terms of the S&P500, it turns out the collapse of the Soviet Union and the proliferation of the Internet were not big deals).
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Why is this important to what we are doing today? Because it allows for a simple “is it reasonable” test? What does it take for the market to diverge from the trend? If you go through the chart and consider the major economic and geopolitical events that were occurring each year, you quickly realize that market trends for years until some significant events occur – the reconstruction of Europe (US oil and equipment mass exports to Europe), the Korean and Vietnam wars, the Carter energy crisis, the Reagan economic boom, the proliferation of the microcomputer (the age of Bill Gates), the collapse of the Soviet Union (opening communist countries to the global economy) and the internet bubble. The thing that all of these events have in common is that they effect the global standing of the United States as the dominant economic superpower which is reflected in the S&P500. Is the world changing today and is US economic standing in the world shifting? If so, what direction and why?
The interesting trend of the last four years, is the incredibly low amount of volatility. Is this just a reaction to the recent big bull/bear cycle, or is it reasonable that global access to information via the internet has become so prolific that the majority of the world’s investors are now looking at the same data, thinking the same way and spotting the same trends? Wouldn’t that effectively kill any trend before it ever evolved to extremes? The trend of the past 4 years gives a fairly reliable set of ranges to work with and is absolutely in line with the growth of the last half century. Is there any reason to expect a change?
Before I started tracking this year, I debated what time frame I should try to time the market around (daily, weekly, monthly). I choose to try the short term to start, since theoretically it has the highest possible returns. I am going to try a new longer term approach next year (probably a 50S/50I split) buy and hold the channels/sell the breakdowns system.
I believe that in developing any strategy, you have to look at the action of the last four years, and expect that to continue until there is some significant changes in global economics.
