Over the holiday I thought a lot about predictions and how they are formed.
The dictionary meaning of prediction is a statement about a future event or data.
Many of the predictions for 2024 that I have seen are made by what we assume are knowledgeable people in the financial fields.
Probability, intuition, experience, inductive and deductive reasoning are all factors that go into making predictions.
In the case of Raymond Lo and the Chinese New Year, his predictions are based on his research, education, and experience. Lo has become famous for his accuracy correctly predicting hundreds of events.
I incorporate his predictions with mine. I like to think that makes my predictions stronger. (you can find them all on our website under Market Beat.
This year in particular I find predictions fascinating as we have what is known as statistical inference or models based on cross-sectional data at play.
In other words, based on last year’s performance of the market and this election year, models are statistically favoring gains in the market for 2024.
“In science, a prediction is a rigorous, often quantitative, statement, forecasting what would be observed under specific conditions.”
And that’s the rub about stock market predictions.
“Under specific conditions” which means what happens if those conditions change? Or, how do chaos theory and randomness factor in?
We already know that there are factors that can create more chaos such as:
- Geopolitics-supply chain, labor issues-possible recession followed by more inflation
- Natural Disasters
- Debt and government spending
- Dollar in a downtrend
- Misstep by FED in reducing rates too fast or keeping rates flat while CPI picks up
Not to mention the notion of randomness or something occurring we cannot imagine or prepare for in advance.
In chaos theory there is the butterfly effect or the metaphor butterfly that flaps its wings in New Mexico and causes a tsunami in Japan. We have lots of butterflies flapping their wings!
Wikipedia states that “economic events may span several years, and the world is changing over a similar time frame, thus invalidating the relevance of past observations to the present. Thus, there are an extremely small number (of the order of 1) of relevant past data points from which to project the future.”
Let’s just call them lagging indicators.
However, since we cannot ascertain unforeseen events and this year, we already KNOW what can create havoc, but we do not know if nor when,
WHAT CAN WE DO?
It’s all 2 things:
- Evaluating Market Behavior with Tools
- Risk Control
As for tools, January is a great time to study calendar ranges-something Geoff is teaching in a course tonight How Identify Profit from January’s Big Trend Trades.
And I will discuss and write about a lot in the next 3 weeks.
Furthermore, chart patterns and phases will be helpful to become familiar with. And risk- well that’s everything really.
Active investing this year will be key.
Remember the dragon and how we do not want to tickle it?
Right.
Enjoy it when the dragon is the gate of heaven.
However, without risk controls, investors can get hurt not only because of the nature of predictions and the unknown (plus the knowns we can’t predict if/when they exacerbate)
But also, because this year -the Year of the Dragon-we must be even more vigilant as the dragon can also be the gate of hell.
Twitter: @marketminute
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.
