By Gill Eapen, decisionoptions.blogspot.com

Predictions with power and magic
The number of experts who are able to predict the stock market’s every move has been puzzling. I have been watching the business news TV with great interest in a desperate attempt to learn how the experts are able to predict market moves. There appears to be some common themes in these predictions. For example consider the following predictions:

“Market volatility will continue”
“Market is in a bottoming process”
“Buy. Markets will go up sometime in the future”
“Sell. Markets may go down in the future”
“Just hold your stocks. In the long run markets will go up”
“Markets look forward 6 months and so if you know what will happen in 6 months you know what markets will do today”
“I am bullish in short term, bearish in the short to intermediate term and bullish in the intermediate to long term”
“You should always be in the market. When it goes up, it goes up very fast”

All of these predictions may sound intelligent and may be delivered after significant analysis (we can’t be sure). However, if you study them, you can see that these statements could be made by anybody (not just the experts) and if delivered with confidence on TV, these may sound good. But not much analysis is needed to make these predictions and there is no information in such predictions. The other way to make a “name” in market predictions is to take a side. For example, one could say something like “in 6 months, S&P will go up.” In this case, one can go back on TV if the predictions come true (there is a slightly higher than 50% probability for this) and if it does not come true, drop out of view for a few months and go back to make another prediction.

Another way to predict the markets is by the “bracketing technique.” A senior executive from one of the investment banks has been delivering it perfectly. When S&P was at 1400, she predicted it will be between 1350 and 1450, 12 months out. At 1300, she felt that it will be between 1250 and 1350 and at 1200, you guessed it, the forecast for 12 month price was between 1150 and 1250. To her credit, she has not made any predictions after S&P dipped below 900, all in less than 6 months.

The other way of doing this is to make a large number of predictions (as seen in after market shows on business TV) so that the complete set of predictions will be difficult to keep track of by the observers. For example, if one makes up predictions on 50 stocks and down predictions on another 50, 50% of the predictions will likely be correct. One trick to reinforce one’s infallibility is to analyze the predictions afterward. For example, one could highlight the 20 of the 50 predictions that were correct and then pick 5 out of the 50 incorrect picks and say something like – “I really went wrong on these 5.” Most people who listen to such an analysis may conclude that the forecaster is not only a good person but also a great fortune teller.

Forecasting of prices in commodity markets are done by those with a strategy. It is magic.