Marc Cuniberti: The methodologies of predicting market direction
September 2, 2018
The movement of stocks is everything but a science.
Technical analysts point to charts and graphs claiming the history of stock movements illustrated as patterns will forecast what a stock may do in the future.
Based not on fundamentals such as how a company is doing, but relying more on a keen eye for comparing what stocks may have done in the past, they believe this will forecast what will happen in the future. This historical analysis may not only predict a particular company's stock movement but may also be applied to a group of stocks or perhaps even a particular geographical market.
So say the technocrats.
What I call the "Macro" guys don't care about charts but rather what is going on in the world of money and politics and basically anything that could affect the planet and the people living on it. These folks just say, "As goes the world, so goes the markets."
Of course some of these analysts took it in the shorts when Trump got elected thinking if the Donald won, the world and hence the markets would come to an abrupt end. Well the only thing that ended was the markets "go nowhere" bias, and it screamed upwards almost nonstop since the election.
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Still other analysts peruse over a company's financials and predict how business will be and hence draw that conclusion out to the price of its stock.
Certain stock gurus might look towards the future as to what industries or geographical areas might be possibly coming into a cyclical hot streak and which might be falling out of favor in the eyes of the wholesale investor.
Other analysts might look at the amount of money flowing in or out of a sector or geographical region and some eyeball what the Federal Reserve is doing and then draw their conclusions from there.
Computer programs are written to forecast stock movements and are often used by some as their crystal ball.
Then there is "high frequency" trading, which some call technically cheating. High frequency trading is rumored to front run stock orders electronically using massive computers, basically seeing orders in milliseconds mid-stream.
Then based on some mathematical quant's algorithm, go into hyper drive and cut in line, sort of speak, hoping to catch a few fraction of a penny's worth of profit by gaming the system. It's all part of the fact-versus-rumor mill of course.
Who really know what goes on in the trading rooms of the huge conglomerate money firms?
Some might even chalk up stock decisions based on the month, the cycle of the moon, an alignment of celestial bodies or even numbers on a wooden cube (yes I personally saw this method used once).
No matter what the method or the math, the truth is markets are do not react scientifically nor predictably. The day to day movements are only the sum of all the players and their perception of whether it is a good day to buy stocks or sell them.
Being an extremely large group of course, much like a herd of animals, they can meander peacefully one day and stampede in all out fear the next.
So goes the mentality of the herd. Predicting what they will do and where they will go is impossible, and only when it happens will we know the outcome in hindsight.
As to market foresight however, it's the holy grail of stock prognosticators, and so far, nobody has found it.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. He is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at 530-559-1214 or SMC Wealth Management, 164 Maple St #1, Auburn. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com.
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