Probable versus Possible

In the context of participating in incidents with the fire department I tend to think of things as being probable or merely being possible. For example a week ago yesterday we had a small wildfire on a hill that was surrounded by houses. Based on the time of the year, the lack of wind, the footprint of the fire when we got there (which was pretty quickly) and that we had 17 people respond to the call it was not probable that the fire was going to explode into a catastrophic loss of six or seven houses. Of course it was possible that it could have gotten away, anything is possible with a wildfire and this same type of incident occurring in June would have been much more of a threat to turn into something horrible but as it turned out a bad outcome was not probable and the probabilities worked in our favor. A reader left the following comment on a post of mine that was run at Seeking Alpha. …That’s why I’m waiting for return to 400-600 on the S&P to ride the coaster from the bottom up… To me, this raises the exact same issue of probable versus possible. Of course it is possible for the S&P 500 to make a new low versus the March 2009 low but it is not probable. Getting to 666 on the SPX took a combination of the “worst financial crisis in 80 years” and an overall sentiment that was still favorably disposed to stock market participation and generally trusting of the system. In other words most participants did not...

Probable versus Possible

In the context of participating in incidents with the fire department I tend to think of things as being probable or merely being possible. For example a week ago yesterday we had a small wildfire on a hill that was surrounded by houses. Based on the time of the year, the lack of wind, the footprint of the fire when we got there (which was pretty quickly) and that we had 17 people respond to the call it was not probable that the fire was going to explode into a catastrophic loss of six or seven houses. Of course it was possible that it could have gotten away, anything is possible with a wildfire and this same type of incident occurring in June would have been much more of a threat to turn into something horrible but as it turned out a bad outcome was not probable and the probabilities worked in our favor. A reader left the following comment on a post of mine that was run at Seeking Alpha. …That’s why I’m waiting for return to 400-600 on the S&P to ride the coaster from the bottom up… To me, this raises the exact same issue of probable versus possible. Of course it is possible for the S&P 500 to make a new low versus the March 2009 low but it is not probable. Getting to 666 on the SPX took a combination of the “worst financial crisis in 80 years” and an overall sentiment that was still favorably disposed to stock market participation and generally trusting of the system. In other words most participants did not...

Sunday Morning Coffee

A couple of items from Barron’s to chew on. First is an article titled The Worst of Times to Buy Stocks? which features analysis from a couple of people including John Hussman. People who read Hussman at least occasionally will find his comments familiar. He notes the following current concerns with US equities; • the Standard & Poor’s 500 trading at more than 8% above its 52-week exponential moving average • the S&P 500 up more than 50% from its four-year low • the “Shiller P/E,” based on the cyclically adjusted trailing 10-year earnings, developed by Yale economist Robert Shiller, greater than 18; it’s currently 22 • the 10-year Treasury yield higher than six months earlier • the Investors Intelligence’s bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears Hussman says these indicators add today to a list of “A Who’s Who of Awful Times to Invest” similar to past times where the market has gone on to do poorly. However he also concedes that these factors can persist for weeks or even months before the market starts to roll over. I’ve been writing about Hussman for many years as I have taken a little bit of process from him to create my own process. One difference with this part of the process is preferring to take a “defensive posture” when index price levels indicate there is a problem. An observation like the one offered by Hussman is, in my opinion, a reason to become more skeptical but not yet make portfolio changes. The indicators notwithstanding, the...

Sunday Morning Coffee

A couple of items from Barron’s to chew on. First is an article titled The Worst of Times to Buy Stocks? which features analysis from a couple of people including John Hussman. People who read Hussman at least occasionally will find his comments familiar. He notes the following current concerns with US equities; • the Standard & Poor’s 500 trading at more than 8% above its 52-week exponential moving average • the S&P 500 up more than 50% from its four-year low • the “Shiller P/E,” based on the cyclically adjusted trailing 10-year earnings, developed by Yale economist Robert Shiller, greater than 18; it’s currently 22 • the 10-year Treasury yield higher than six months earlier • the Investors Intelligence’s bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears Hussman says these indicators add today to a list of “A Who’s Who of Awful Times to Invest” similar to past times where the market has gone on to do poorly. However he also concedes that these factors can persist for weeks or even months before the market starts to roll over. I’ve been writing about Hussman for many years as I have taken a little bit of process from him to create my own process. One difference with this part of the process is preferring to take a “defensive posture” when index price levels indicate there is a problem. An observation like the one offered by Hussman is, in my opinion, a reason to become more skeptical but not yet make portfolio changes. The indicators notwithstanding, the...

Stocks Keep Rallying

The run for the US market continued yesterday as the S&P 500 closed at 1351. The SPX has a 7.5% gain for the year which is a great start to the year. You can still be a bear and acknowledge it is a great start to the year for equity prices. If you are a bull you probably think this will continue and if you are a bear you might predict it will end today. As a quick note I really dislike assigning animal caricatures to market cycles but there is a certain economy of words that is convenient. My thesis for 2012 has been that there would be a range busting rally that will then mostly retrace. So far this is not wrong but it is worth throwing out a couple of reminders about how markets tend to work. This is an important communication to clients and hopefully non clients can find some utility as well. If my theory of a range buster turns out to be precisely correct then we might see SPX 1570 by summer time. That level would would represent a 25% rise from the year end figure of 1257–again my thought is big and fast rally that then retraces a lot. Again, this will be right or it will be wrong but if it does go to 1500 or 1550 or even 1600 in such a short time there could easily be a “scary” 10% drop in the middle of that sort of run. Big fast rallies have happened many times in history. The magnitude of my base case would be far from record...

Stocks Keep Rallying

The run for the US market continued yesterday as the S&P 500 closed at 1351. The SPX has a 7.5% gain for the year which is a great start to the year. You can still be a bear and acknowledge it is a great start to the year for equity prices. If you are a bull you probably think this will continue and if you are a bear you might predict it will end today. As a quick note I really dislike assigning animal caricatures to market cycles but there is a certain economy of words that is convenient. My thesis for 2012 has been that there would be a range busting rally that will then mostly retrace. So far this is not wrong but it is worth throwing out a couple of reminders about how markets tend to work. This is an important communication to clients and hopefully non clients can find some utility as well. If my theory of a range buster turns out to be precisely correct then we might see SPX 1570 by summer time. That level would would represent a 25% rise from the year end figure of 1257–again my thought is big and fast rally that then retraces a lot. Again, this will be right or it will be wrong but if it does go to 1500 or 1550 or even 1600 in such a short time there could easily be a “scary” 10% drop in the middle of that sort of run. Big fast rallies have happened many times in history. The magnitude of my base case would be far from record...