Stock Market Advice for a Bumpy Week

I’ve been quiet for some time because there hasn’t been much to write about. But after yesterday’s stock market rout, why not chime in? What’s worse is that as I write this the futures are predicting another rout – but we have a big employment number coming and time will tell how today plays out. Anyway, what’s a little rout after the 5 year run stocks have had. Here are a few thoughts to go with your morning paper, or more likely iPad news:

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Jay Shenk Resume


Trading Philosopher Wanted

There’s an interesting exchange where you can make “bets” on various stock indexes, commodities and events. It’s called NADEX. For instance you can bet that the S&P 500 will be over 1720 at 4:00 this afternoon. It’s somewhat like options except they are daily and weekly. You have a defined risk and reward which is based on the odds participants place on that situation happening. I have been playing with a demo account. I was contacted by someone from the exchange who sent me some handbooks about various strategies. The handbooks have charts and graphs talking about premium decays and the like technical stuff. I’m very reminded of options and futures books that lay strategies out like they are mathematical formulas – all very scientific and genius looking. Well reasoned and thought out, rational, sane, erudite, academic and totally impressive. The best minds are hard at work figuring this stuff out.

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There is a commercial on TV for Prudential Insurance. It states that while people are living longer, the retirement age has remained the same. Thus you have more retirement years. The spokesman asks “how will you have enough money to enjoy all those years?”, the inference being that Prudential knows how to do that. Excuse my inherent cynicism but this Holy Grail lies in knowledge of what the future will bring. I’ll admit that it is a noble question for the normal person, and one we’d like to have the answer to, but there are so many variables that it is impossible to give any certainty.

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A Correlation Does Not Equal Cause and Effect

There is a lot of prognostication going around which attempts to predict what the stock market will do based on past trends. You see this sort of thing all the time—sometimes it is correct, but often it’s simply randomness which would equal out in the long run. Correlations do not necessarily show ‘cause and effect’, although the news media often presents them that way. Remember the study of eating a good breakfast with eggs—it led to better performance at school. Did it really, or was it a correlation based on the fact that getting a good breakfast was also correlated with having an involved parent who stayed at home, or perhaps being from a wealthy family that could afford good breakfasts, or even perhaps a maid to cook them? The reprinted article below gives a classic example of what looks to be a predictor, but obviously isn’t: There is a strong correlation between who wins the Super Bowl and how the stock market performs. Makes you wonder about financial advisors vs. flipping a coin.

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