From: John Conover <john@email.johncon.com>
Subject: Re: Truth in prognostication
Date: 10 Jan 2001 19:39:33 -0000
Well, its January 10, 2001, and you know what that means; its time for
the great (trumpets blare,) "Truth in prognostication" interim update.
To refresh your memory, on January 10, 1998, the "Truth in
prognostication" series started, (because there was a lot of
irresponsible prognosticating being done by market professionals at
the time,) with predictions on what the US equity markets were going
to do the following day, week, month, year, and decade. The rules of
the game were that I had to make the predictions, based only on
looking at graphs of monthly and yearly data for the US market indices
from http://www.stockmaster.com, and could use no programs, straight
edges, protractors, compasses, graph paper, calculators, Tarrot cards,
broker speak, astrology, numerology, etc.; only calculate the
probabilities in my head using simple approximations to the rules of
entropic analysis.
For the last two years the reviews of the 1998 predictions have been
posted on the Internet at
http://www.johncon.com/ntropix/FAQs.html#calculation, where the
Internet search engines distribute them to whoever is foolish enough
to waste time looking at them, (and there are many that foolish-they
are the most frequently hit pages on the site.) They are attached-just
for your edification.
First to some administrative details. As you will recall, (see
attached,) the predictions made A's and B's, so far, with one
exception-the prediction that 1998 would be a bear year. It kind of
was, so it got a C+, (for a good prediction, it must correctly
forecast the direction, magnitude, and date of a market movement; it
got two out of the three, which was a C+.) In retrospect, it missed
predicting a bear market by 25%, (60 trading days, December 1998 to
March 1999-and the indices have not moved since, except H.M.S NASDAQ,
which did a once-a-century bear movement; no pun intended.)
Although tempted to elevate its grade on the annual projection to a B,
(the prediction was contrary to the prevailing wisdom of a new
economy, which it wasn't in both cases-but there are no points for
being almost right with a contrary prognostication,) I won't move the
goal posts-its grade on prognosticating a 62% chance of 1998 being a
bear market remains only a C+. Its overall grade, so far, of a B,
stands.
So, what does the interim future hold?
Well, here goes the interim prognostications.
Casting my calibrated eye on the 3 year data for the DJIA, S&P500, and
NASDAQ indices at http://www.stockmaster.com, it looks about like the
bear market started about the first quarter of 1999, and a year later
for the NASDAQ.
Since the DJIA and S&P500 have been flat for two years, there is a
50/50 chance that they will turn bull about mid 2001, with a growth
rate about double their average, call it 10 to 20% a year, for two
years. If it doesn't happen this year, it will have about a 55% chance
of happening next year, 60% the year after that.
The NASDAQ is more difficult, because we are only about three calendar
quarters into a bear market-and I can only use yearly and quarterly
data.
The chances are 50/50 that the *_quarterly_* bear market will end by
the end of first quarter this year, 55% that it will end by second
quarter, 60% by the end of third quarter, and 65% by the end of 2001.
If the bear market continues through the first quarter of 2001, (and I
get a bear year to forecast from,) then there is a 70% chance that it
will continue into 2002, and a 50/50 chance that it will turn bull in
early 2002, at which time, its annual growth rate will be about double
its average value, or about 30%.
John
BTW, what I had to do with the NASDAQ was to use the fact that fractal
statistics are self-similar; the same at all time scales. This means
that the bear and bull "bubbles" at the quarter and year are
independent of each other-one can have bear quarterly "bubbles" in
bull years, and vice-versa, in all combinations, at all time
scales. The "bubbles" at different time scales operate independently
of each other.
John Conover writes:
> Well, it is January 10, 1999. As you will recall, just to refresh your
> memory, I made some prognostications-on January 10, 1998-using only
> simple fractal analysis that could be done in one's head concerning
> whether various time intervals in 1998 would have bull or bear equity
> markets.
>
> I kept up with the prognostications throughout the year, as you will
> recall, and sent out updates-since most folks don't use search engines
> on their email, and I do, they are dutifully attached. Remember, it
> was in the spirit of "Truth in Prognostications" that I did this-I was
> tired of all of the market druids not being held accountable for their
> prognostications. (The original message had the "Subject: forwarded
> message from Spirit Of Truth Page", which contained a rather
> pessimistic prognostication for 1998, which just flat disagreed with
> anything rational-the original message was removed from the attached.)
>
> If you will recall, the prognostications that I made involved whether,
> starting on January 10, 1998, the next day, week, month, and year,
> would be bear or bull. I made the prognostications based on going to
> http://www.stockmaster.com/, getting the DJIA graph, and counting back
> by the day, week, month, and year, to find the last day, week, month,
> or year, that was opposite to the state of affairs in the markets on
> January 10, took the square root of that number, (in my head,) and
> said that that was the reciprocal of probability that the state would
> continue, or change. (The actual market has about a 10% exponential
> increase per year, but I ignored that, since compound interest is hard
> to work out without a calculator-and it had to be done in one's
> head. Also, it is not a Gaussian or normal distribution on the
> increments-instead of being the square root function, n^0.5, it should
> be n^0.6, but I ignored that, too, since I couldn't do that in my
> head, either. Likewise, I also ignored the error function-it is really
> the erf (1 / sqrt (n))-since I couldn't do that in my head. I then
> said, since there is correlation between the market indices, that most
> markets would be similar.) But what I did was reasonable, with a
> calibrated eye, and the ability to take the square root of small
> numbers in ones head. As you will recall, (from the second attached
> message, dated "Sat, 31 Jan 1998 09:48:40 -0800",) it did quite well,
> at least through the month.
>
> And, how about the year?
>
> There was a 62% chance of a "bear" year. The DJIA ended up 10.8%, its
> worst showing since 1994, and below it average for the century,
> including the depression years of the 1930's, call it neutral-maybe
> slightly "bull". Both the S&P and NYSE ended up a little over 20%
> gain, call it "bull" and the broader indices, the Value Line, the S&P
> 2000, and anything that included midcap stocks ended up in the red,
> call it "bear". So, it is kind of a judgment call, I would call it
> slightly "bull", and give it a C+ at the end of the year for the
> prognostication. (I went out on a limb with the 62% number-what that
> number means is that I would expect to be correct 62% of the time, and
> wrong, 38% of the time.)
>
> All in all, not that bad of a set of prognostications, for something
> so simple it can be figured out in one's head, by looking at a graph.
>
> John
>
> BTW, if I would have said that there is a 62% chance that the DJIA
> would be below its average of 10.6% growth per year, it would have
> predicted it correctly for the day, week, month, and year-but I would
> have had to use a four function calculator to figure what the 10.6%
> annual growth was at the day, week, and month. If I do that, I have a
> problem that the prediction was 100% correct, and can't account for
> not having 1 or 2 of the four predictions turn out to be wrong. The
> 62% number is actually quite a bit closer to 100% if you use n^0.6
> instead of n^0.5. But that was not part of the "deal". I could not
> use numerical data, (all I could do was look at a graph,) and could
> not use a calculator, computer, or any analytical program. Even so, it
> turned in more respectable numbers than the market gurus did. The
> updates I mailed through January (from Reuter, API, and UPI,) had the
> prognostications from the gurus-if you want them, let me know.
>
> --
>
> John Conover, john@email.johncon.com, http://www.johncon.com/
>
> -------------------------------------------------------------------------------
>
> >From john@email.johncon.com Sat Jan 10 17:30:02 1998
> Received: (from john@localhost) by johncon.com (8.6.12/8.6.12) id RAA18713 for john@email.johncon.com; Sat, 10 Jan 1998 17:30:02 -0800
> Message-Id: <199801110124.RAA18665@email.johncon.com>
> Reply-To: John Conover <john@email.johncon.com>
> MIME-Version: 1.0
> Content-Type: text/plain; charset=US-ASCII
> Content-Transfer-Encoding: 7bit
> From: John Conover <john@email.johncon.com>
> Subject: forwarded message from Spirit Of Truth Page
> Date: Sat, 10 Jan 1998 17:24:54 -0800
>
> The attached is more Domesday prognostications from the macroeconomics
> community. The attempt utilized is to establish some sense of
> credibility for such prognostications through a consensus of media
> reports. Not being daunted by the selective democratic polling of a
> the members of a profession which is founded on inductive reasoning,
> (ie., statistics,) I worked my way through the numbers:
>
> Chances of 1998 being a "bear" year? 62%, (and a 38% chance of
> being a "bull" year.)
>
> Chances of January, 1998 being a "bear" month? 41%, (and a 59%
> chance of being a "bull" month.)
>
> Chances of next week, (starting 12 January,) being a bear week?
> 29%, (and a 71% chance of being a "bull" week.)
>
> Chances that the day of Monday, 12 January, will be a "bear" day?
> 45%, (and a 55% chance of being a "bull" day.)
>
> Chances that the day of Monday, 12 January-if it is a "bear"
> day-of the equity markets dropping at least 6%? 0.13%. (Note that
> such small probabilities do not mean something will not
> happen-only that there exists a remote possibility that it will. A
> better way of looking at such things is that we would expect a 6%
> daily drop in the equity markets every 769 business days, or about
> once every 3 years.)
>
> Although not cause for unbridled optimism, the probabilities certainly
> do not justify cynical pessimism, either.
>
> Is a US equity market disaster possible? Yes it is, (that's life.) Is
> it probable? There is a little less than a 0.0001% chance that the US
> equity markets will drop 33% in the month of January, 1998, (or, very
> roughly, about the same chances of perishing in a commercial aviation
> disaster,) which is about the average drop in the Asian Tiger's equity
> markets for the month of December, 1997. (Note that such small
> probabilities do not mean something won't happen-only that there
> exists a remote possibility that it will.)
>
> How about the probability of 1998 ushering in a sustained bear market
> lasting at least 25 years, (as from 1930-1955, ie., a great depression
> starting again?) 20%. (20% sounds almost eminent, huh? Well, not
> exactly. There is also a 27% chance that the "bull" market that
> started in 1984 will continue through 1998. There is, also, an 11%
> chance that the current very "bull" market, that started in 1992 will
> continue through 1998.)
>
> John
>
> --
>
> John Conover, john@email.johncon.com, http://www.johncon.com/
>
> -------------------------------------------------------------------------------
>
> >From john@email.johncon.com Sat Jan 31 09:49:03 1998
> Received: (from john@localhost) by johncon.com (8.6.12/8.6.12) id JAA00262 for john@email.johncon.com; Sat, 31 Jan 1998 09:49:02 -0800
> Received: (from john@localhost) by johncon.com (8.6.12/8.6.12) id JAA00248; Sat, 31 Jan 1998 09:48:40 -0800
> Date: Sat, 31 Jan 1998 09:48:40 -0800
> Message-Id: <199801311748.JAA00248@email.johncon.com>
> From: John Conover <john@email.johncon.com>
> Subject: Re: forwarded message from Spirit Of Truth Page
> Reply-To: John Conover <john@email.johncon.com>
> MIME-Version: 1.0
> Content-Type: text/plain; charset=US-ASCII
> Content-Transfer-Encoding: 7bit
>
>
> And, how has it turned out so far? So far, so good. Have to wait and
> see how the year turns out ...
>
> John
>
> > John Conover writes:
> > >
> > > The attached is more Domesday prognostications from the macroeconomics
> > > community. The attempt utilized is to establish some sense of
> > > credibility for such prognostications through a consensus of media
> > > reports. Not being daunted by the selective democratic polling of a
> > > the members of a profession which is founded on inductive reasoning,
> > > (ie., statistics,) I worked my way through the numbers:
> > >
> > .
> > .
> > .
> >
> > >
> > > How about the probability of 1998 ushering in a sustained bear market
> > > lasting at least 25 years, (as from 1930-1955, ie., a great depression
> > > starting again?) 20%. (20% sounds almost eminent, huh? Well, not
> > > exactly. There is also a 27% chance that the "bull" market that
> > > started in 1984 will continue through 1998. There is, also, an 11%
> > > chance that the current very "bull" market, that started in 1992 will
> > > continue through 1998.)
> > >
> > > I just received some email requesting an assessment of the probability
> > > of at least the following decade, starting 1 January 1998, being
> > > "bear" or "bull."
> > >
> >
> > The probability that the decade would be bear/bull is 50%/50%, almost
> > exactly.
> >
> > So, starting with 12 January, 1998, the probabilities stack up as
> > follows:
> >
> > Chances of at least a quarter century "bear" equity market: 20%.
> >
> > Chances of at least a one decade "bear" equity market: 50%.
> >
> > Chances of at least a one year "bear" equity market: 62%.
> >
> > Chances of at least a month "bear" equity market: 41%.
> >
>
> There was a 59% chance of a "bull" month. It was-barely. (NASDAQ,
> Up. DJIA, up. NYSE, Jan 1 = 511.19, Jan 30 = 510.63, call it
> neutral-maybe slightly "bear." S&P, Up.)
>
> >
> > Chances of at least a week "bear" equity market: 29%.
> >
>
> There was a 71% chance of a "bull" week. It was, for all indices.
>
> >
> > Chances of at least a day "bear" equity market: 45%.
> >
>
> There was a 55% chance of a "bull" day. It was, for all indices.
>
> >
> > John
> >
> > BTW, note that these probabilities only apply to 1 January 1998, and
> > will be different for any other day/week/month/year/decade in the
> > quarter century. Note also that the probabilities change over time.
> > For example, the probability that the decade starting 1 January 1978
> > would be "bear" was only 29%, (ie., a 71% chance that it would be
> > "bull," which it turned out to be.) Note, also, that the
> > probabilities are dependent on the time scale-although there is a
> > likelihood that the quarter century will turn out to be "bull," which
> > days in the quarter century will be "bull," (or "bear,") can only be
> > forecast a few days in advance. Likewise for the weeks/months/years.
> >
> > As an interpretation of the probabilities for the US equity markets,
> > beginning on 12 January, 1998, the near short term is somewhat
> > optimistic, changing to optimistic for the week, and somewhat
> > optimistic on the outcome of the month, but pessimistic on the year,
> > neutral on the decade, and optimistic on the quarter century.
> >
>
> -------------------------------------------------------------------------------
>
--
John Conover, john@email.johncon.com, http://www.johncon.com/