The recent rally in stocks has seen a mood swing in commentary that would suggest the break of 2050 in the S+P 500 has seen a form of capitulation. We are left with a mood of resignation that ‘everything is just wrong’ but don’t fight it and just accept that the ‘Santa Rally’ is what to expect for the rest of the year. To the point that 2014 has been effectively written off with the focus moving on to placing new chips on the table for 2015 (as indicated by the proliferation of 2015 trade ideas hitting the circuit).
The stream of calls for tops in equities has diminished and those that remain are turning to more exotic arguments that are more witch doctor than convincing. They normally involve a chart of what happened in the past overlayed with a chart of now.
With so many failing examples of what happened 'last time' being used to argue what will happen 'this time', perhaps we should instead be using the 'this time' to reprogram our metrics for future 'next times' instead of always looking backwards and assuming 'last time' is 'this time'.
Financial commentary is terribly focused upon how wrong everything apparently is. Equities shouldn’t be here, bonds shouldn’t be there, you name it and there is a blast of noise from somewhere declaring just how wrong the current situation is. But the inescapable fact is that however wrong it may appear, it is right. It is there staring you in the screen. So where is the dark matter of argument that is needed to explain the difference between the theory and reality?
There is always a bias in what we hear from any quarter (and this applies to politics, environmental issues, justice or I suppose just about anything) as those who think things are just fine tend not to say anything. There is a pain threshold that needs to be breached in the levels of discomfort before the screaming starts. The fact that things that are said to be wrong appear to remain wrong is perhaps proof that the majority is usually silent. If the majority were in discomfort then as a majority they would have said and done something about it. The silent majority is the dark matter.
I have wondered if this idea of the noisiest tending to be the minority could be used (or perhaps we do use it) as a reverse indicator. The more yelling about an issue either on social media or in the news, perhaps the more representative of the issue being one of a minority concern. This can’t be applied to short term events, such as terror acts, where everyone is rightly shocked about it, but where an issue has had time for something to have been done and yet nothing has, then perhaps the idea of it being a minority interest can be applied as the majority don’t care enough to do anything about it. As the market is the sum of the wisdom of crowds, perhaps the noisiest people are reverse indicators when trying to work out what will happen next.
To test the theory we could sample Twitter and see if a majority of tweets have been about the dangers of something happening that subsequently doesn’t. I leave that for you to do as I have already made my own mind up on that point. Unfortunately the most likely outcome is usually the most dull and is the result of slow process rather than shock event (back to the outcome of our dark matter silent majority).
This could also be applied to regulation as well. The loudest screaming about the FX fix fixing scandal has hardly been from professionals but from people in comments columns who often prove no deep knowledge of the situation other than expressing a propensity to scream about bastard bankers, whilst meantime happily paying 15% spreads in the local post office for their holiday money. 'Tis they that should be ignored and the quieter opinions of those that understand the issues taken into consideration.
Never short a quiet market, but as 2014 has shown, never short a noisy one