Forget Data Mining… Here’s The Only Stock Market Predictor That Actually Works
by Alexander Green, Chief Investment Strategist
Monday, March 15, 2010: Issue #1216
There are lots of theories about how to predict future stock market performance.
Most of them are the sheerest nonsense.
There is, in fact, only one indicator that virtually guarantees you will be on the right side of the market.
But first, let’s look at the most popular source of misconceived market predictions: Data Mining…
Data-Mining Investing Strategies… Don’t Expect Reliable Answers
Every year, investors pour billions of dollars into data-mining investing strategies. They come with impressive-sounding features like “proprietary trading tools” or “McMillan Oscillators.” But the money might just as well be invested on a coin toss because the reasoning behind it is completely baseless.
What dating-mining strategists typically do is “back-test,” or simulate what would have happened if you’d used a particular technique in the past (typically without incurring any fees, trading costs or taxes).
It’s not hard to look back and see what the market did under certain circumstances. For example, what has the S&P 500 historically done when the Federal Reserve starts raising interest rates…
- Early in an expansion?
- During the late summer?
- When the U.S. President is a Democrat?
- In an election year?
- After a team from the old National Football League wins the Super Bowl?
In truth, it doesn’t matter, regardless of what parameters you use. You can look at GDP growth, inflation levels, stock market valuations, long-term interest rates, the price of gold, or the value of the Swiss franc to the dollar.
As irresistible as data-mined numbers sound for making predictions, the whole shebang is based on a faulty premise…
Don’t Fall Into the Data-Mining Trap
The first thing you learn in Statistics 101 is that a positive (or negative) correlation does not infer causality.
In other words, even if stocks have rallied every second Thursday in May for the past 50 years, it doesn’t mean they will rally this year on the second Thursday in May. Data-miners regularly turn up meaningless correlations and claim they have discovered how to divine the stock market.
If history could determine what the stock market is going to do next, the world’s richest investors would be historians, data-processors and librarians. And that’s not the case.
The hypothetical results of data-mining always crumple when they collide with real-world investing.
There is only one sure-fire market timing strategy. It’s only available occasionally. Plus, it takes guts and a genuine contrarian spirit…
The Best Time to Invest in the Stock Market
The best time to invest is when you see extreme valuations coincide with extreme sentiment.
For example, if unbridled optimism reigns supreme – as it did during the tech-stock bubble ten years ago and at the top of the real estate craze four years ago – and prices are sky-high, you can bet your last dollar that prices will soon come tumbling down.
By the same token, if abject pessimism is the order of the day – as it was during the financial crisis one year ago – in concert with rock-bottom valuations, you can bet that a rally isn’t too far distant.
Indeed, the Dow is 62% higher today than it was a year ago.
That’s why you might want to invest a few dollars today in one of the world’s cheapest and most unloved markets: Japan.
What’s the difference between data-mining and seeking out extremes in sentiment and valuation?
Two things, really. The latter strategy doesn’t require a rabbit’s foot – and it works.
Good investing,
Alexander Green
Related Investment U Articles:
- “Enormous Consolidation” Expected in Gold Mining in 2012
- Why Gold Mining Stocks Are About to Skyrocket…
- Komatsu: Japan’s Version of Caterpillar
- Gold Mining Stocks Still Look Undervalued
- Sunshine Silver Mining Goes Public, But Struggles to Profit
4 Responses to “Forget Data Mining… Here’s The Only Stock Market Predictor That Actually Works”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
Agree with you about not being able to predict the stockmarket. BUT WEISS RESEARCH reckons they can with their ‘foundation’ cycles – yes it does seem like bullsh*t but…
::::::::::::::
RED ALERT:
The Foundation
for the Study of Cycles has just gone to “DEFCON ONE!”
Major new profit opportunities and dangers are set to rock the markets in mere days !
MAJOR investment recommendations to be issued March 23, 2010!
This is your FINAL opportunity to activate your membership for just $199!
Returns compounded annually. Click here for stats plus details regarding methodology, assumptions and limitations.
The same scientific cycles that have accurately forecast nearly ALL major turning points in stocks, bonds, currencies, gold, oil and commodities since 1971
And that could have helped you beat the S&P 500 FOUR TO ONE … enjoy 18 consecutive winning years since 1992 … and multiply your money more than 26 times over since 1971* …
Are now sending a CLEAR WARNING that major new profit opportunities and dangers are set to emerge later this month!
Here’s what you must do NOW to help protect yourself and potentially profit!
By Monty Agarwal
Dear Rog,
When the military believes our armed forces must prepare for imminent action, they upgrade their status to Defense Condition One — DEFCON 1 — MAXIMUM readiness.
Likewise, when the Foundation for the Study of Cycles tells me the time is very near to start jumping into the five major asset classes — either for major up or down moves — our Million-Dollar Rapid Growth Portfolio goes into a similar state of readiness.
I take the Foundation’s alerts very seriously, and so should you: Ever since it was created in response to President Herbert Hoover’s request during the Great Depression, every scrap of data the Foundation has gathered helps prove that, in investment as in life, history tends to repeat itself.
That simple fact of life — combined with the Foundation’s hundreds of years of cyclical historical data — is the reason it has been sponsored by leaders of The National Bureau of Economic Research … The Smithsonian Institution … The Carnegie Institution … and Fidelity Investments.
And it’s also why scientists from Harvard … Yale … Princeton … Oxford … Temple University … Western Reserve and other globally respected institutions have contributed to its archives containing 5,000 years of cyclical data.
And most importantly, it’s why the Foundation’s cycles have forecast — publicly and accurately — nearly every major directional shift in stocks, bonds, currencies, precious metals, energy and commodities for 39 long years!
As a result, simply following the Foundation’s cycles in each of these asset classes could have helped you …
Enjoy 18 consecutive winning years since 1992 …
Multiply your money more than 25 times over since 1971 — enough to turn $10,000 into more than $258,000 … $100,000 into nearly $2.6 million … or $1 million into more than $25.8 million, and …
Make 111% since 2000 — in one of the most difficult investing environments ever — more than double what investors would have made using a buy-and-hold strategy.
This is precisely why we built our new Million-Dollar Rapid Growth Portfolio around the Foundation’s cyclical data — and why it is so critical that you heed the warnings it is giving us right now …
The Foundation’s cyclical signals
have just gone to “DEFCON ONE!”
MAJOR investment recommendations
must be issued soon!
As you read this, all of our indicators are showing that major cycles are converging — in U.S. stocks … in the dollar and other currencies … in gold and other precious metals … plus oil and other commodities.
Each of these cycles is either confirming that a major move is about to get under way or about to resume. Here are just a few prominent examples:
U.S. STOCKS: The Foundation’s cycles point to solid gains through June or July — but huge dangers through the end of the year and beyond.
GOLD: The precious metals cycle is now signaling that the recent correction is about to reverse and a new surge is about to carry the yellow metal to $1,300.
OIL: A run to $90 per barrel — and perhaps beyond — is about to begin.
CURRENCIES: The Aussie dollar and the currencies of other resource-rich countries will leave the euro and the U.S. dollar in the dust, even while others fall against the dollar.
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I have and still use Techsignal software, the problem is for the cost there is zero support and as for Weiss I feel they use far to much fear tactics… remember the are out to make money and they really are not concerned if you make money even if they state that. I’m a life time member of the oxford club and they ,as you stated, “bullsh*t”
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Mr Green
Would you kindly give us some Japan’s stock recommendation Trades at US Exchange, thank you.
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Yes, the Japanese market is cheap but it has been so for about 20 years now. What makes you think that now is the time to buy?
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