What Happens Next?


Screenshot 2013-12-03 08.44.53

Without knowing the X or Y axis of this chart, what do you think will happen next?

I'm not an equities expert or an investment advisor of any kind.

I think this actually helps me to step away from the calculator and the regressions. When learning about regressions, I always thought to myself that they are a great way to make .2% modifications, but often, the most important things can be seen on a regular line graph.

I feel the same way about high frequency traders and the whole field of quantitative investing. A lot of the analysis I read will respond a .1% change in one thing and then extrapolate that onto other assets this change will impact.

Sometimes, this overlooks the big picture.

If you're reading this blog, you probably guessed that the chart above is the S&P 500. When you step back from all the micro factors, it's painfully obvious that we are at an all-time high. Awesome, right? Well, not if you see history as a guide for the future.

Typically, when the economy surges to an all-time high, it reverts to the mean (or below it) in the coming years. Bulls say "ah, but look, companies are more profitable - now that they've trimmed their workforce in the last crisis". Yeah, that's true. And quantitative easing will never stop. And unemployment is getting a bit better. And signs of recovery in housing. And fuel prices arent too bad. Yes, I know, I know. And if you torture the #s long enough, you can probably regress out an undeniable story on the bull side.

But stepping way back. Is the US economy (and the companies in it) in a MUCH better state than it has ever been before? Have we undergone a fundamental improvement to our national competitive advantage, labor supply, balance of trade, etc? Is the global economy in a better position to provide the revenues to fuel our biggest companies? Have we done so many of the "right things" to get our economy setup for 10 years of solid fundamental progress?

I don't see it, which is why I am exiting the market. It's at 1800 right now. It's probably going to go up some more before it falls. I'll look like a fool during that entire period (and will be white-knuckling my Fidelity account), but I'm going to fight the urge to jump back in. I'll be standing by, waiting for ~1300.