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Prediction: The future of the USA stock market
UCLA Department of Earth and Space Sciences ^ | July 17, 2003 | D. Sornette and W.-X. Zhou

Posted on 08/02/2003 11:04:34 PM PDT by ThePythonicCow

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To: ThePythonicCow
Good idea!
21 posted on 08/03/2003 12:26:00 AM PDT by novacation
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To: ThePythonicCow
Correction - Nov 2000 (the day after the election).
22 posted on 08/03/2003 12:26:19 AM PDT by ThePythonicCow (Mooo !!!!)
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To: ThePythonicCow
My personal prediction:
Dow, 7500-7700 sometime in mid-October

Very bad Christmas season, Dow 5500-6000 by Feb 1.
23 posted on 08/03/2003 12:37:02 AM PDT by djf
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To: ThePythonicCow
Looks interesting, but it's too late for me to think tonight, I'll review it tomorrow. Thanks for posting it.

Whether or not I will end up agreeing with it, it's still interesting.
24 posted on 08/03/2003 12:53:04 AM PDT by FairOpinion
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To: ThePythonicCow
If the good professors' predictive methods are valid, they should be able to withstand testing in which all market data after some arbitrary date in the past is ignored, and "predictions" made from that point. Those predictions would then be compared with the actual data.

For example, if Jan. 1, 2001 were taken as a starting point, would these methods have been to predict the behavior of the market between then and today?

What about 9-11 you say? Proponents of these rigorous technical analysis methods would say that if 9-11 had not happened, "something else" would have. Or, nothing, for that matter. To them, the market operates as it pleases, while the fundamentalists fit real world events to the market after the fact. The tail wags the dog, in other words.

I also notice the fractal image on the book's cover. It's not clear what they mean to imply by the choice of this pretty picture, but it should be noted that "fractal behavior" (i.e. nested waves and cycles) can disappear at the most inconvenient times as the system shifts into a chaotic mode, or into a totally different wave/cycle pattern.
25 posted on 08/03/2003 1:14:37 AM PDT by Fresh Wind (Never forget: CLINTON PARDONED TERRORISTS)
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To: Fresh Wind
Actually, you can check something like you are asking for, whether his methods, given earlier data, can predict more recent results.

Go to the original for this article, Prediction: The future of the USA stock market , and you will see a pull down list "Other Predictions". It has copies of his predictions, dating back as early as October 31. 2002. They predict that the market will rise from then, to a peak in the first half of 2003, before falling all through later 2003, and early 2004.

The portion of his prediction that has already transpired was pretty good, and his predictions of what is still the future have not changed substantially.

26 posted on 08/03/2003 1:42:51 AM PDT by ThePythonicCow (Mooo !!!!)
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To: Fresh Wind
And yes, the problems that fractal phenomemon present for forecasting are as you state. Just when you think you've the pattern figured out for one scale, along comes a change at a larger (or smaller) scale that messes you up.
27 posted on 08/03/2003 1:45:47 AM PDT by ThePythonicCow (Mooo !!!!)
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To: ThePythonicCow
BTT
28 posted on 08/03/2003 1:49:45 AM PDT by nopardons
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To: ThePythonicCow
I don't believe in all of the technical analysis BS...It seems absolutely ridiculous to me. Past performance is no guarantee of future behavior. If we had listened to the ta guys, we would have been buying like cracy and nasdaq 5000.."TRIPLE TOP BREAKOUT...BUY SIGNAL", and vice versa when we hit rock bottom. It's absolutely ridiculous. You should invest on the fundamentals, and based on how much faith you have in the overall US economy...not on ridiculous "waves" and so-called "cycles" which are just observations after the fact.
29 posted on 08/03/2003 1:51:36 AM PDT by Capitalism2003
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To: Capitalism2003
I was about to post almost the exact same thing. All the TA stuff I've seen, is guys drawing lines on charts for support, etc.

It's like making a general statement "I get 19 miles per gallon in my car, it's got 26,000 on it, so I think it will go until it has 160,000 before I need to trade it in"

Way too general and ignoring fundamentals, like the air filter, transmission, etc. Even if all the conditions are excellen for making a product, there still needs to be buyers. The fundamentals of the market now are quite bad. New technology acquisitions are being deferred because theres still alot of the tech from the bubble that can be had for pennies on the dollar. If lending capital dries up, it's not good. And lending capital is based in large part on the overall health of the economy. The snake is eating its tail.
30 posted on 08/03/2003 2:01:46 AM PDT by djf
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To: Capitalism2003
My, my, something touched a nerve for you.

The stock market is not just a simple reflection of the strength of the economy or business fundamentals. There are also some group behaviours going on, some herding, which is what the cycles are somtimes used to show.

That there is such group behaviour going on seems self evident to me. If you find that possibility threatening, then I'll wager a pint that this reflects more on you than it does the stock market.

However, since I am not paid nor qualified to be your analyst, either financial nor psychological, I will not be able to assist you in resolving that conundrum.

31 posted on 08/03/2003 2:11:49 AM PDT by ThePythonicCow (Mooo !!!!)
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To: djf
They are. And I agree with your pessimistic forecast.

Both the fundamentals and the psychology of the market (as reflected in these 'waves') sucks.

32 posted on 08/03/2003 2:14:12 AM PDT by ThePythonicCow (Mooo !!!!)
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To: ThePythonicCow
Psychology is the trump card, and the bigwigs know it. But a lot of people are extended to the max already, and no incentive can make them borrow more, given employment uncertainty, etc. I'm somewhat surprised the government hasn't taken a stronger stance against offshoring, because that by itself, no matter how successful it really ended up being, would short term boost consumer confidence.
33 posted on 08/03/2003 2:26:45 AM PDT by djf
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To: ThePythonicCow
On average, the market has gone down for the last three years. Mathematical models using just this data will predict further declines.
On average, the market has gone up for the last ten years. Mathematical model using just this data will predict further increases.
Thousands have attempted to use past data to predict future performance. They have had no better luck than they would have had flipping a coin.
34 posted on 08/03/2003 6:16:21 AM PDT by norwaypinesavage
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To: ThePythonicCow
Using a validity baseline from Oct 02 thru mid-July 03 is ridiculous.

If the good professors were even interested in demonstrating the validity of their method, they would (very easily, btw) have run annual backtests of prediction vs. result for the last 40 or 50 years, or at least back to the start of the SP500 futures (1982).

Without such backtesting, no matter how spiffy the analysis, any conclusion drawn about the validity of the predictive method is at best shaky and more likely simply worthless.

35 posted on 08/03/2003 9:56:10 AM PDT by SAJ (Trust government, any government, and you're digging your own grave)
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To: SAJ
Backtesting before the year 2000 is meaningless on this model. It is not a model for all seasons. It is a model for post-bubble collapse. He makes references to testing this model on the aftermath of other bubbles, though I haven't checked these references, so can't comment on their persuasiveness.

If you haven't realized by now that it's a model for a particular phase, or season, of the market, then I suspect you aren't reading closely enough. Perhaps you just skimmed it, and brought out the usual attacks on anyone who fits some curve to stock prices and then projects that curve.

Of course, so far as I see here, his model also doesn't predict when we are no longer in the post-bubble collapse phase, at which point his model will die a horrible death. That's part of the challenge imposed by the fractal nature of markets - just when you've got the pattern figured out, it up and changes on you.

And this of course limits ones ability to get filthy rich off this model, even if it were everything it was cracked up to be. If you bet the farm on it, leveraged to the hilt, then when the model breaks down, you're one of the ones jumping out of a 40-th story penthouse window.

When someone like myself reads his model as saying "It's going to be a sad sad Christmas", we're saying more than is in his model. We are also saying that it's our opinion that his model will still be worth the pixels its painted on, in another five months. We're looking at a variety of other fundamentals, tea leaves or whatever we use, and reaching the conclusion that we are still in this phase. Reasonable people can and do disagree on that matter; the ones that are right will be rewarded, with money from the losers pockets.

His model doesn't say that this is what will happen over the next year; it says that this would be what happened, if the current phase continues. Even if the authors claim that their model is stating what must be over the next year, rather than what would be if the model happened to still hold, one still can't find fault with the model on that account, just with the authors hubris.

Like any model, to extend it from "what would happen if the world would kindly consent to continue following the pattern I've noticed" to "this is it, this is your destiny; do not attempt to adjust the controls, we are in charge", would be an abuse of the model. And to claim that anyone finding this model, or any other model, interesting, is so abusing models is to create a paper tiger.

Find something more challenging to put down next time.

36 posted on 08/03/2003 1:07:35 PM PDT by ThePythonicCow (Mooo !!!!)
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To: ThePythonicCow
How curious, then, that no analysis of the other recent great post-bubble period, specifically Mar 73 through 1975 was included. Sure, no futures available, but so what -- one can easily generate an implied futures price by any of several methods.

The article, in any practical sense, is worthless: the data set is far too small, ridiculously so, nor is there any indication of what one's strategic approach to the mkt should be, in order to achieve some sort of profit. Models (sic) with exactly one data point or data period are instances of either the dishonest or incompetent use of statistical analysis, are purest BS. Sorry if you disagree (and, please note, I made no ad hominem comments about you. Do try to return the favour).

37 posted on 08/03/2003 1:42:40 PM PDT by SAJ (Trust government, any government, and you're digging your own grave)
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To: arete; SAJ; norwaypinesavage; djf; Capitalism2003; nopardons; Fresh Wind; FairOpinion; ...
Aha - after a nights sleep, it seems obvious what this pattern is showing us: deepening involvement.

Have you ever followed behind a big truck and noticed that you could tell how heavily loaded it was, by the frequency of its vibrations when it went over bumps. A backend that wiggles quickly is a sign of a lightly loaded truck; a backend that moves ponderously is a sign of a heavily loaded truck.

What we're seeing here is a market moving with increasing ponderousness. More and more of the economic and financial markets are getting caught up in the pattern, causing the waves to run deeper, run slower, over time.

If the pattern continued unabated, then it would lead to the premature implosion of the Universe. I suspect that we have unanimous consent here that this pattern won't continue that far. So now we're just disagreeing on when the pattern will break down, cease applying to reality. Last month, next year, next decade, it never applied in the first place; pick a number, place your bets.

Some of my colleagues (I'm in Silicon Valley high tech) got caught up in the ".com" boom of the late '90s. They have already washed ashore, in the waves of the last three years. I'm in the tech boom of the last couple decades; my boat is taking on water, but still afloat, though we have had to throw alot of stuff (and jobs) overboard, to keep it from sinking already.

Many folks on FR have not yet gotten any closer to this storm than musing over the evening weather report showing rain and wind in far off lands.

But, back to this model, what it is showing that in a post bubble market, the collapse cuts increasingly deeply into various associated markets, moving bigger and slower as it gains mass.

Until one day, some other pattern begins to take hold. But this model doesn't help us identify that day, so far as I can tell.

38 posted on 08/03/2003 1:45:37 PM PDT by ThePythonicCow (Mooo !!!!)
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To: SAJ
The authors do study other post-bubble collapses. What I posted doesn't analyze it, but the book Why Stock Markets Crash? referred to in this posting claims to:

I take it that you are saying that the only practical sense in which this article would be useful would be if it helped one make money in the market. If it can't do that, it is worthless BS.

I also find value in models (and essays, pictures, cartoons, FR postings, ...) that seem to capture some element of where we are now, or what has happened so far, even if I can't just plug it into my Excel spreadsheet and retire to a South Pacific island next year.

Not every expression must guarantee profit to have worth.

Sure, mathematical models and charts can be mechanically extended to appear to predict future events. But in doing so, one is just showing where the model goes. The model itself does not predict when the model will break down, cease applying to reality. Sooner or later, they all break down.

39 posted on 08/03/2003 2:00:49 PM PDT by ThePythonicCow (Mooo !!!!)
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To: SAJ
When all is said and done, I doubt that this period will end up on the list of Top Ten post-bubble periods.

My bet is that the period we are now in, will.

40 posted on 08/03/2003 2:07:54 PM PDT by ThePythonicCow (Mooo !!!!)
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