The longer I've traded the less respect I have for stock market predictions. Predictions are a favorite game of Wall Street. The market is going to be up 20% in 2019, the bull market is going to end, Apple (AAPL) will underperform for years and so on and so forth.
It isn't too surprising why the business media is full of such predictions. They provide drama and sensationalism. There is no shortage of pundits that want to bask in the glory of making a "big call." What better marketing is there than to be the guru that predicted a major market move? Without predictions and chest-thumping pundits, business media would be deadly dull.
The problem with predictions is that they are worthless without strategy. Most predictions are simply all-or-nothing proclamations without any discussion of the probability of being right or wrong. They are bets on a single outcome and are binary in nature, which makes them worthless to prudent traders that must deal with a spectrum of outcomes.
In the next few weeks we are going to see hundreds of predictions from "experts" about what the market will do in 2019. Typically, the big firms will predict gains of 10-20% and then they hope they are close so they can use that in their marketing materials.
What is an individual market player supposed to do with a prediction like this or the many others that we will see? Place a bet, cross their fingers and hope it comes true? If that is your approach to the market then you might as well just go to a casino. It is a reliance on luck and nothing else.
You make money in the market by having a strategy. A prediction may be a starting point for a strategy but it is the easy part. Predicting that the market will rally into the end of the year doesn't require any great skill. Anyone can do it and, if luck is on your side, you may be right.
Predictions must be accompanied by strategy. What do I do if the prediction is wrong? What action do I take if things don't play out in the manner that I predict? Even when predictions are correct they seldom occur in the manner that we think they will. You may predict a rally into the end of the year but what if the S&P 500 drops 3.3% and takes out some key support before that occurs? What action do you take?
One question we almost never see addressed by prognosticators is at what point do you abandon a bad prediction? The modus operandi of most pundits is to keep repeating the same prediction and hope that you forget their entry points. Sooner or later the market will cooperate and they can proclaim victory and the fact that it was a losing trade will be forgotten.
It is good to have a market thesis in mind when you trade. You have to have some sort of opinion about the market in order to develop a strategy but success will depend on the right strategy to a far greater degree than it will on the right prediction.
Right now my thesis is that the market will have a decent rally into the end of the year. I was surprised by the extent of the pullback this week and that caused me to take some stops on positions. I still like that thesis but it needs confirmation in the form of better action in the indices and, especially, in individual stocks.
If the indices stumble again in the near term and take out support levels I will have to reposition again and then wait for the next development. If support holds and individual stocks act better then I will need to work hard to identify what stocks to buy. Predicting a year-end rally makes a nice headline but it won't make you much money.
I really have no idea what the market is going to do in the next year. I do know that I can develop strategies to make money no matter what does occur. I don't need the market to go up 20% next year. I just need stocks to go up and down.
There are many folks that will make predictions in hopes of gaining your attention. It may be good entertainment but without strategy, predictions are worse than useless.