Tag Archives: predictions

Currensee Trade Leader Alex Kazmarck of SpotEuro LLC presents predictions for 2014... and things are already moving faster than anticipated...

I expect trading ranges into the New Year and the first few days of the new calendar year since most activity will being on the 6th of January since the 2nd and 3rd fall on a Thursday and Friday, not likely to be market movers without some significant catalyst.

Going into 2014, I think traders will continue to debate the US monetary policy and how new Federal Reserve Chairwoman Janet Yellen will manage the QE exit, or perhaps even stay the course (now known as the “new normal”), continuing to support the US economy if data begins to show signs of weakness. Traders will also look closely at growth in both US and Europe, with the latter being a focus of peripheral growth outside of Germany. It’s important to add that economic divergence in Europe will also put pressure on politics as well as the ECB, possibly calling for a weaker euro or a change to ECB’s mandate. Finally, Japan will also be in focus as the BOJ’s 2% inflation target may be difficult to reach and with a looming increase in sales tax from 5% to 8%, some members of the board have expressed concern in the Q3 GDP growth figures. How will the BOJ attempt to reach its inflation target without hampering growth? These are the stories that will likely drive price action during the next 12 months.

Technical Analysis

In the next few weeks, as everyone gets back to their desks and volumes begin to pick up, there are certain levels that I will be monitoring for directional purposes. Taking a look at the EUR/USD, the pair has maintained an upwards trending channel; however, it was not able to break above the 1.3820 high set in late October just before ECB surprised the market with a reduction in the benchmark interest rate. Despite the rally that followed in November and early December, I am still looking for a move lower to 1.3500 before continuing lower to the 1.30s. This view will be negated if the pair breaks higher and closes above the 1.3800 level. To the downside, this view is supported on a close below 1.3600 with next support at 1.3500 and 1.3400. A close below 1.2750 should begin a new down trend.

On the other hand, should the pair close decisively above 1.3800, I will target 1.4250 and 1.4500 as levels of resistance where the pair will likely consolidate. I don’t see much support for this view as Europe continues to lag the US in economic growth and monetary tightening. I will also point out that the current top of 1.3833 is also the 61.8% retracement from 1.4920 high in May of 2011 to the low of 1.2043 set in July of 2012.

I expect the euro to end 2014 between 1.2500 and 1.2800 with 1.20 and 1.38 as the low and high respectively.

Summary

Keeping in line with the “new normal”, I find it difficult to believe that the US economy will be able to sustain such growth in both the labor and financial markets in 2014 as it had during 2013 without continued pressure to keep yields low with its current QE purchases and force money into riskier assets. Inflation will be an important figure to watch, especially if the Fed decides to lower interest on excess reserves below zero as this should fuel banks to lend more, fueling consumption. The themes that made headlines in 2013 will continue to be the front runners in 2014 and should be followed closely.

Short term resistance – 1.3750-1.3800

Short term support – 1.3650-1.3600

At what point do we stop wondering what the crystal ball will show next?  Lately, every time I turn on the TV, the newscaster is announcing a new prediction for our economic future.  Sometimes two channels are simultaneously reporting completely different forecasts.  At this rate, how can one put faith in any of these hypotheses?  Will we eventually tire of these predictions (which are really nothing more than educated guesses) or will we just give up and roll with the punches?

Our favorite Irish economist Charlie Fell explores our "Prediction Addiction" in his latest blogpost.  Read the full article here.

 

Prediction Addiction

PDF

Print

E-mail

Human beings are hard-wired to detect patterns and identify causal relationships amidst the constant stream of new information.  This behaviour can be traced to our ancestral past on the African savannah many millennia ago, where the ability to shape expectations from small samples of data, enabled our hunter-gatherer ancestors to successfully forage for edible fruits and seeds, stalk prey, avoid predators, find shelter, and seek mates. 

Scott Huettel, a neuroeconomist at Duke University, explains that, “The brain forms expectations about patterns because events in nature often do follow regular patterns:  When lightning flashes, thunder follows.  By rapidly identifying these regularities, the brain … can expect a reward even before it is delivered.

The ability to anticipate outcomes from regular patterns undoubtedly helped our ancestors to flourish but, Huettel warns that, “in our modern world, many events don’t follow the natural physical laws that our brains evolved to interpret.” The human brain is designed to conserve scarce neural resources, and so much so, that it requires only a single confirmation to anticipate a recurring pattern.  Huettel notes that as a result, “The patterns our modern brains identify are often illusory…

Pattern recognition and subsequent tactical buy or sell decisions are part and parcel of active investment management.  Investors however, often place too much emphasis on the recent past when forming expectations about the future – top-down analysts make tactical calls based on recent economic data, while technical analysts divine the future on historical patterns in stock prices.

Investors’ ‘prediction addiction,’ as the behaviour has been called by the financial columnist, Jason Zweig, is particularly relevant today.  Economists are busy shaving their economic growth forecasts for both this calendar year and next, following a string of disappointing data that fell well short of expectations.  Meanwhile, technical analysts are arguing for a reduction in equity allocations, given price action in the major stock market averages that confirms a change in the underlying trend.

Recession fears are afoot and investors are in need of guidance that will preserve capital and/or yield profits amid the uncertainty.  Indeed, anticipating turning points in the business cycle and, adjusting asset allocation accordingly, is central to successful top-down investing.

Unfortunately, economists have a patchy forecasting record at best, having failed to anticipate every one of the last five recessions.  Indeed, the monthly publication, Blue Chip Economic Indicators, noted in July 1990 that, “the year-ago consensus forecast of a soft landing in 1990 remains intact” – the economic expansion peaked that very month!

More than a decade later in March 2001, fewer than five per cent of economists anticipated that there would be a recession that year, even though a downturn was set to begin just days later.  More recently during the spring of 2008, the calls for a soft landing were almost deafening, despite the fact that the deepest recession since the 1930s was already underway.

Perhaps the study of historical price patterns performs better.  After all, stock price data is not reported with a lag and, unlike economic data, is not subject to revisions that continue several quarters after the fact.  As William Hamilton, the fourth editor of the Wall Street Journal wrote in his 1922 classic, ‘The Stock Market Barometer’ – “The market represents everything everybody knows, hopes, believes, anticipates, with all that knowledge sifted down to ... the bloodless verdict of the market place.”

The study of historical price patterns suggests that a further decline in the major market averages may lie in wait.  The 18 per cent fall in stock prices from their recent peak late-April, resulted in a bearish ‘Death Cross’ signal on August 12, as the stock market’s 50-day moving average of closing prices dropped below its 200-day moving average.

The ‘Death Cross’ is considered by technical analysts to be a portent of future weakness, but is the signal’s presumed ability to anticipate turning points and enhance investment performance supported by the historical record?  To find out, the ‘Death Cross’ and its converse, the ‘Golden Cross’, are employed as tactical sell and buy signals respectively, for a simple long/short strategy and, the investment results – excluding dividends – are compared with those generated from a straightforward buy-and-hold strategy.

The historical record shows that before the most recent ‘Death Cross,’ there had been 63 tactical signals since the summer of 1949 – 32 buy and 31 sell signals – which, gives weight to the late Paul Samuelson’s criticism in 1966, that ‘The stock market has predicted nine out of the last five recessions.

The buy and sell signals resulted in 33 winning trades and 30 losing trades, which is not much better than a coin toss.  More importantly, the price return generated by the long/short strategy saw an initial $10,000 investment compound to $537,000 over the period, as against $775,000 for the buy-and-hold strategy.

The historical evidence suggests that the ‘Death Cross’ adds no value to the investment process.  However, a more complete examination of its credentials reveals that it subtracts from investment performance during secular bull markets, which are characterised by powerful up-trends with only the briefest of interruptions; it adds to performance during secular bear markets, which are characterised by a protracted sideways pattern that is punctuated by violent downward price swings.

The bearish indicator provided ample warning to investors of impending danger, close to a market top in both the autumn of 2000 and the winter of 2007.  Has the ‘Death Cross’ sounded an early warning bell once again?  Time will tell.

 

-------

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.