No it isn't. Poker provides simple evidence of this. Decisions in a poker hand can be made entirely based on probabilities and expectation, without "predicting" what the next card will be. Or a venture capital example. If a VC allocates his capital across 10 potential startups, he will pick each startup because he likes the risk:reward profile. He may well expect to lose money on 7 out of 10, or even 9 out of 10, with the confidence that, over a statistically valid period of time, the home runs will make up for all the whiffs and then some. Is this VC "predicting" which of the 10 will take off? No -- if he knew that, he wouldn't need to spread his bets. He may well say "I have no idea... that's why I made 10 +EV bets" (with +EV being delivered in aggregate, if the methodology is good). Taking attractive risk:reward scenario trades with +EV expectation is the same way. It's not the same as prediction. Okay dokey. Though as Specterx pointed out, you seem to be willing to take outsized risks based on some very fuzzy notion of what constitutes "hard evidence" at some point in future. Truth be told I have no idea what your risk is, but you speak in such a manner as to suggest it isn't really quantified. When you do things like blithely assume that a correction, if it it comes, will only be "5 or 10%" it tells me we think about risk very very differently. Once again you are talking about some hypothetical index trader. I am talking about my own trading -- as mentioned, our short book is more or less at breakeven risk now, because our shorts were mostly entered earlier, in positions where downtrends and breaks were confirming before the major indices break. As for optionality, the contrast was between a trader who uses price action to keep risk points reasonably close, allowing positive exposure to fat tail distributions on the positive P&L side. One could argue a long can do the same thing with a tight sell stop, except the case for being long here has been significantly degraded by situational dynamics. You did indeed mention "what would prove the bull case wrong," but again you speak and write as if your risk points are either very far away or not in the market at all, which, to me, is not really quantifying risk in any meaningful way. Value investors can talk in the same terms, saying they will change their mind "when evidence calls for it" and meanwhile sinking deeper and deeper into value traps. That isn't quantified risk. What? I didn't say it was a mistake for you to do anything. I don't recall advising you as to what to do... and as for gold, I never predicted what gold would do per se. I voiced the strong opinion that gold was a very lousy risk:reward proposition from the long side, and overall I am still biased that way (given the way gold is acting -- we remain short FCX from higher levels with confirming price action today). Ok. Now you are talking in quantified risk terms about a specific market (and possibly a specific position). You are also laying out specific price levels as to what your definition of "a bear market or correction" means. But this is different than all the stuff you were saying before, re, changing your mind when evidence appears of profit margins contracting, not worrying about a correction that will "only" be 5 to 10%, and so on and so forth. As for whether it's a good risk:reward scenario, I still think it's a shitty one, but that's a different discussion... and I don't recall saying anything about "hail mary" either. My main points previous were in respect to blithe acceptance of tail risk, which were highlighted mainly in response to your very fuzzy intimations of what would make you sell (since shifted here with the introduction of some hard and fast price levels, which may or may not be on the mark, but at least represent something more quantified). Again I think much of our disagreement comes from very different philosophical perceptions -- small differences but vital -- as to what the core of trading is and how markets work...
Even if the bull case is not intact it seems quite likely we can get 1390 or so, I may take it myself if there's an opportunity to get in between 1350 and yesterday's low.
Fair enough, but can you give some examples from say the last 100 years of US stock market history where we had a Dow/S&P bear market just because of a foreign recession (no US recession)? Bear in mind that the market 1 year ago didn't see Europe on the radar at all, then became scared it would collapse and cause a US recession. This caused a 20% peak to trough decline in equities. The market is now well aware that Europe has problems, so it would be much less of a surprise. So, what are the odds that anticipated bad news (EU problems this year) causes a fall as big as surprise bad news (2011 EU)? I'd say that's relatively unlikely.
I would dispute that Europe's problems are any more 'anticipated' this year than they were in 2011. Recall that Greece was originally bailed out in 2010; what subsequent developments should have been surprising? The only meaningful occurrence in the intervening period was the Fed's QE2, which succeeded in gunning risk assets for a year. More or less exactly the same thing has now occurred with the LTROs. It's not the recession that's the problem, it's the banking, sovereign-debt and credit crisis which was halted temporarily by the LTROs, but now threatens to re-emerge and engulf Portugal and Spain at a minimum. I should also point out that there is simply no ironclad connection between "recession/no recession" or even quarter-to-quarter earnings growth, and equity market performance. The mid-70s bear market saw something like nine straight quarters of earnings growth while SPX declined by 60% in the same period.
A prediction is simply 'a claim about the future' (dictionary definition). You don't have to be certain to make a prediction - a probabilistic claim that scenario X is more likely than scenario Y is still a claim about the future. Anyway, it doesn't matter much because it's just semantics, we can easily define "probabilistic prediction" and "prediction based on certainty" to avoid any confusion. Obviously as a trader it is an elementary blunder to do the latter, so I assumed that no one would be silly enough to think I would actually subscribe to it. The main point is that in my initial posts I listed scenarios (e.g. bull market, range, bear market/correction) and talked about likelihood of each, and how I would tell which was playing out - so it's absurd for you to come back and try to claim I was not doing so. A series of posts which explicitly mentioned the possibility of a bear market, correction, or trading range - and how I would try to identify and respond to each scenario as it unfolded - in no way indicates 100% certainty in a continuing bull market. I already addressed the index vs theme issue. I did not criticise having on specific shorts, I simply said that right now the odds are against being short the market i.e. net short exposure. In one of the early posts I specifically said that shorting thematic plays, whilst having on index or thematic longs to offset it, would be a better way to play things like China or Europe. Even if you are a pure stock trader, you are exposed to moves in the general market. So, talking about what levels of market exposure to have on, is useful and important. Optionality has a value and a price. If the price you pay for that optionality is too high relative to the value, you will on average lose money. Otherwise we could just make trades with close stops every day and retire in a few years. I already stated my argument - with no confirmation of a serious correction or bear market, the odds favour the bull market remaining intact; and with support relatively close, and resistance now quite far, and the market having moved down quite far in a short time, the odds are not strongly in favour of the short side here. Hence my suggestion to wait for the first rally, and see how that unfolds, before placing shorts - I even specifically mentioned how to put on some limited risk OPTIONAL bets (I *literally* recommended buying some puts on the next rally to near the old highs, if you are bearish) on further downside. The only thing I did was explain the various scenarios as I saw them, and say why I thought the odds favoured being long at that point. I stated how I'd know I was probably wrong, and what action to take in that case. I even stated my view on how to trade the opposing position with limited risk and (IMO) a more favourable setup i.e. by waiting for the first rally. Hardly monolithic or based on certainty! So, can you explain how you managed to totally miss all that stuff, and concoct a totally misrepresentative interpretation of my posts? I still have no idea where you got that from.
The answer to the first question is the Russian default(not recession but the EU thing is all about default) To the second point, I wouldn't agree. Yesterday was a great example, Spain and Italy got killed and the ES followed. I'm not sure how much people realize that the 'improvement' in Europe was self-fulfilling due people thinking things were better which made things better(like PIGS spreads over bunds) The same thing will happens in reverse. If Italy or Spain defaults tomorrow of couse SPX will tank(Even if there is no recession or meaningful impact in earnings), its human nature
Global events have more of an impact now because, in terms of tail risk and capital flows, the world is more interconnected than ever before. Who would have expected that sleepy German banks would be some of the biggest losers in the subprime financial crisis -- a crisis initially deemed so inconsequential, due to the tiny size of the subprime market, that Cramer literally laughed at it? There are all kinds of linkages and connections that are hard to identify, let alone assess accurately. The global financial system is both complex and tightly coupled. (See Bookstaber: http://www.amazon.com/Demon-Our-Own-Design-Innovation/dp/0471227277 ) It isn't hard to visualize domino chain scenarios such as "Recession in Europe exacerbates slowdown in China --> which in turn impacts Japan --> which in turn accelerates China/Japan disgorging of USTs --> which then leads to Federal Reserve outlier policy response X, which derails markets via Y etc..." Nor is the point to spin out a specific scenario, per se. It is an open-minded way of thinking about risk, and understanding the increasingly prevalent nature of hard-to-pin-down risks... which can also function as opportunities, if one is positioned correctly. Again, it comes back to philosophy and conceptual understanding of risk:reward. From the point of view I'm talking about, historical evidence has value in terms of scenario chain building -- getting a sense of what might happen -- but it certainly doesn't have value in terms of risk mitigation. The idea that "it didn't happen then so it probably won't happen now" is anathema to the risk-averse mindset I am describing. The probability and expectation oriented trader strives NOT to predict the future... NOT to be overly sanguine in respect to unknowns... but instead to develop scenario chains and study situational dynamics for the pursuit of laying down limited risk, positive expectation bets. There is a humbleness here, an embrace of fallibility, that is hard to put in words... a combination of fallibilism, perspectivism, and Bobby D's words of wisdom from Heat: "When you assume, you make an ass out of You." Period. http://en.wikipedia.org/wiki/Fallibilism http://en.wikipedia.org/wiki/Perspectivism
Here's my SWAG (speculative wild-ass guess): As a general rule we are 90% on the same page, but it's the diverging 10% that makes the conversation interesting. So we both wind up focusing on that and talking past each other. For what it's worth, I have very much enjoyed our back and forth. It's been a fun exercise in conceptual clarification and food for thought...
By the way, I still think this predict / not predict topic is an interesting one, via the observation that there is a wide divide here, with traders falling on either side. First off, I could argue that a positive expectation bet is not actually a prediction about the future. Rather, it is an observation of the present that makes no meaningful claim on future events. Example: You and I are heads up in a $25-$50 NL cash game. The pot has grown to $5,000 by the turn. The river brings a third heart. Acting first, you bet $2,000 into the $5,000 pot. I have top set, and have to decide whether to call, raise, or fold. There are no pairs or straight possibilities on the board -- so the only thing that beats me is a flush. My pot odds for calling on the river are 7:2, or 3.5 to 1, because I can win a $7,000 pot with a $2,000 call. From an expectation perspective, with a 3.5 to 1 payoff, I am +EV north of 23% (give or take). This means that, if I expect to have the winning hand 23% of the time or more in this exact situation, taking into account all developments in the hand, I am correct to call. If I think my winning chances are, say, 40% or better (because you could easily be representing the flush but actually have two pair, top pair, or a smaller set) -- or anything meaningfully above 25% really -- then the pot odds DEMAND that I call. And yet, how could one consider my call here "a prediction about the future?" In making the call, I am not predicting what cards you have. I am not making a "guess" as to whether you have a flush or not. I really don't know if you have the flush -- and truth be told I don't care. I only know that, with sufficient pot odds it's a trivial calculation... a mathematical calculation that says nothing about future events at all. This is often the situation for a positive expectation bet (from the mindset I am describing). A trader can literally not care what is going to happen, in respect to the outcome of a specific trade, because that trade is a subset of +EV situations that create a profit in aggregate. There is not a "claim about the future" here so much as a claim about favorable situational dynamics existing in the present. Note, too, that the mindset as described above is very different from the trading mentality that says "I believe X is going to happen," or "I believe price level X is going to be achieved." Many traders can and do make claims on the future on a regular basis, instead of operating from an expectations-based Monte Carlo standpoint in which individual trade outcomes are irrelevant (except as learning opportunities for refining assessment of situational dynamics in future trades). There are different classes of trade, of course, with certainty levels varying accordingly -- some opportunities are "back up the truck" type situations, but most not, and so on. Yet this subtle dynamic still applies. Some traders predict, and have a belief on some fundamental level that their claims on the future are valid and actionable. Other traders strive not to make claims on the future of any kind at all, but only to make positive EV bets based on situational dynamics as apparent in the present. Why does this subtlety matter? For the same reason that "sensitive dependence on initial outcomes" can lead to final destinations thousands of miles apart, when changing the initial course bearing by only a degree or two.
You two should consider exchanging your philosophical discourse in a separate thread or entirely in private messages.