Human Beings and Markets assume they think they know what is coming next. The Future is always a result of the Past but it can be completely modified by Uncertainty. To what extent are our behaviors actually nearly the same year in and year out? That assumption, in markets is known as, Seasonality. There is of course no absolute Seasonality in Markets. But there are definite behavioral patterns and timing episodes.
Quasi Seasonals, Black Holes and Golden Halos
What if Markets do repeat in some manner but always just differently enough to surprise us? Many years ago I postulated the market concept of, “Quasi Seasonals.” What if there were stock market corrections say, every year or every 17 months, but no one expected them? Or what if there really are 100 year floods but no one remembers them because there is no one alive now to tell us about them. Thus no one expects them again. There may be multiyear episodes of extremely low market volatility. There may be eras of very low interest rates. I call such periods of Optimistic Complacency, Golden Halos (GH.) However, there are also times when severe market movements occur. I call these instances of short term panic corrections: “Black Holes.”
The current market pattern is changing and sometimes these changes occur so quickly that no one believes it. Of course, maybe markets will just remain ho hum? We generally tend to think that all stock market corrections will be earth shattering. But not all market events are “Black Swans.” They may be “Beige Swans” or maybe even “Taupe Turkeys.” No matter what kind of odd bird the next correction turns out to be, such an unusual market sighting is both best avoided and very interesting to observe. Change is coming.
Knowing the River
Over 50 years ago, I went on a 3 week wilderness canoe trip. As a young person, there was one thing about the trip that I didn’t understand. The leaders had done this river trip several times but they always hired, Harry, an old time local guide, to go along. Why did we need a guide? After all, the river could not have changed? There are maps of the area. But maps are only two dimensional overlays. Looking at a map is very different than actually, Being there, with “Boots on the Ground” which is also known as, “Ground Truth.” Someone who has been down the river many times knows things that might come in handy like the best camp sites, where to find a spring, where the fish are and when a dangerous waterfall is approaching.
Well, Harry, our backwoods guide was a real woodsman. We would watch him take a strip of birch bark right from the tree and make it into a coffee cup in a matter of minutes. He kept to himself and he did not say much but his canoe was always first on the river. So why did we hire Harry to tell us about a River that we were actually floating in? You see, every year the River, like the Market, is a little different. Spring flooding can alter the channels of the previous year and create new rapids. High water may make one side of the river easier to navigate. The channels change. The rapids recur in different locations.
Does a guide make a difference? Yes. Every year on this river, several canoes are bent and broken by being in the wrong channel at the wrong time. There is also a very dangerous waterfall which has no warning signs. You have to be listening to the change in the flow in order to hear it and get to the shore in time. A waterfall is coming. Can you hear it yet? There are problem areas in the stock market every year and there are always unexpected moves, both ways. How many canoes might the majority of investors lose in the next correction?
Harry knew the river and how and when it might change. That is why we had him along. I study the Market Flow and I can tell you when the quasi seasonal’s in the market might change the channels. That is why you might have me along. Still, everyone has to paddle their own canoe.
A Black Hole Environment
A Black Hole environment is coming. A Black Hole is an indicator which I discovered that identifies a Stock Market Low in advance. It is a Quasi Seasonal. Black Holes don’t usually last long.
The facts of Behavioral Science have shown that, “Rationality” is not always the best approach in markets. Actually Ancient Science says the same thing only more cogently and, it was the original insight. The Neocortex is only one aspect of our Cognitive functioning. The human Brain is much bigger and more complex than just Rationality. Moreover the Brain itself is subsumed by another degree of intelligence. You will always hear a lot of talking heads ardently explaining why the market did what it already did. Pundits will always explain the Past but Rationality never provides the understanding or the timing in advance of a Black Hole. Thinking too much might put investors at a disadvantage in this instance. Is the market now at risk because of, North Korea, is it really Trump or is it excessive long positioning? Is it Rates? Is it the Grand Jury? The Jury is out and you don’t need to figure it all out.
Uncertainty, when amplified by multiple negative memetic threads, loses any purely intellectual meaning and simply becomes a Psychological force. Thus there is usually no singular Rational Story to believe in. It is just that “Everything,” seems to become negative all at once. That kind of Market event produces extremely Low sentiment and a price Capitulation. That is why I call it a Black Hole and that why it is a Buy!
Buying Black Holes
Corrections are normal and lawful aspects in Capital Markets. Never expect the end of the world. That wager will always be a low probability event. “Corrections,” are as important as Rallies. It is important to understand when Corrections may occur because every Black Hole resolves into a Buying opportunity.
It’s About Timing
When might a Black Hole happen? I told my grandson that his birthday was coming up. He took a look out the window and said he didn’t see it coming! I see it coming but of course I have studied the market for decades. A Black Hole is a very fast event. While an absolute price high may occur a few months prior to it, the thrust of the BH may only last a few weeks. It may even only be really acute for a handful of trading days. Panic emotions never last very long. Market Timing exists but it is not at all what people think it is. Some important market movements can be predicted, Some of the time. That, “Some of the Time” is enough to guide you to investing excellence. Anyone can opine that a correction will be coming some time or that in the long run stocks will go up. That is not knowledge. I can tell you when a Black hole is coming when it may begin to affect Financial Culture.
This 2017 Black Hole
I used to eagerly share my Market Timing discoveries with anyone. Why bother. Either no one is really listening or they are stealing the ideas as their own understanding. My ideas would show up on some website somewhere and be repeated endlessly by others. That may be expected due to the memetic imitative habits of human beings. I still find it distasteful. If you are going to copy me at least quote me. I am more interested in understanding the market rather than, “Beating it” or, making a “Killing.
I measure backwards in time from any Black Hole to the present to see if the market is behaving in a manner consistent with the onset of a correction. That assists in confirming a market high. We are now in that defined time zone for the actualization of a real change in market psychology. A double Black Hole is approaching and there is also a tertiary BH later on in 2017. Thus this really is a Black Hole environment. I have been patiently waiting for a confirmed stock market high. While a BH can occur at any time of the year, if there is a Summer high, a BH usually occurs in Q3. But the quasi seasonals are different depending on when that High is made. For instance, May highs are different than June highs. Tops in very late Summer tend to lead to very fast declines and in some cases they may be over much more quickly than other corrections. Moreover, in these cases a well-defined short entry may not occur. It can become a price cascade.
Once a High (Golden Halo) is confirmed, I look for a potential Kill Zone (KZ) or, failure from a small bounce, to lead to a rapid decline into the BH environment. The most money on the short side is made from that KZ into the first BH. Again, it can happen very quickly.
Enjoy Every Environment
There are many market seasons. A Black Hole Environment is probably the most noteworthy for investors. But the Recovery Rally after a Black Hole can also be very rewarding. Many Investors are probably going to lose some canoes in this season. No one is perfect. Enjoy every environment. This is no time to take a vacation. Okay, maybe we should all take something like a 17 day vacation and the market won’t do anything at all and market behavior will only turn out to be a Taupe Turkey. But my work suggests that August will be the most negative market month in some time. Today is 8/9. We are headed for the rapids. Follow this guidance. That is all you need to know. I have already done the research work for you. Paddle your own canoe.
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