Small investors are piling into the stock market with an enthusiasm we haven't seen in years. That's never a good sign. Meanwhile, many financial experts with their charts and graphs say there is no doubt - none whatsoever - that we're heading toward a "correction" that will be a big one.  But of course we have plenty of other experts with their own charts and graphs saying the stock market is still a good bet.

Remind me why anyone trusts financial experts?

What you need is a cartoonist to tell you how to invest. My prediction is that there will be a correction of 20% or more sometime in 2013. That will be followed by a jerky climb for the next several months back to wherever the stock was before the fall.

My prediction is based on the observation that the stock market appears to move as if it is manipulated by a network of big players. They lure in the excitable small investors by allowing the market to show a year or two of solid gains then they sell their shares, spook the world with predictions of doom, and buy back into the market at the lower prices.

The way the big players cover their collusion is by synchronizing their sudden exit from the market with bad financial news. And if there isn't any naturally-occurring bad news, they create a phony story of certain doom that sounds plausible. The financial news outlets depend on finding "reasons" for moves in the market, so they are more than happy to report that the phony crisis is the cause. And once a "reason" takes hold in the public consciousness, all of the lesser-important pundits chime in to support that explanation.

When I say there is manipulation and collusion in the financial markets, it doesn't mean there are actual meetings in which billionaires smoke cigars, drink expensive cognac, and make their evil plans. It might be enough that they are all so aware of each other's moves that they just play follow-the-leader and do so faster than small investors. The sort of market manipulation I'm describing only requires one billionaire leader who is closely watched by the other billionaires. When he sells, they sell, and they all understand why.  The big players who time it right get a 40% gain for the year while the underlying value of their stocks is unchanged at the end of it all. It is the perfect crime.

Does any of that sound plausible to you? Or do you believe the markets are mostly honest, give or take a few high profile cases of insider trading?

Normally I wouldn't buy into a conspiracy theory that has no smoking gun type of evidence. But financial markets are a unique situation. When you give people in that industry the motive, the opportunity, and a near-zero chance of getting caught, how can you expect them to play fair? The bigger shock to me would be to learn that the markets are free of manipulation. That would be a violation of everything I know about human nature.

So look for a 20% correction in 2013.

Rank Up Rank Down Votes:  +224
  • Print
  • Share


Sort By:
Dec 10, 2013

In the case of SP500, you still have 20 days to be correct prediction. Interestingly, 20% is what your market has risen since March 1st!

At least here in Brazil, its 20% are partly right. Undoubtedly, there is collusion of big banks manipulating, somehow, the market here, but our government is partly to blame because the market since 2010, to be walking away with a minimal variation of high and exactly 20 %. View index IBXX.

obs:. I wrote it just got, myself, an email from the past (futureme.org) asking me if this article was right.

Mar 6, 2013
Knowing how superstitious business people are, and I've known a statistically significant (to me) few. I want to make a prediction for the year that nothing much is going to happen this year. Nobody wants to start a business in 2013, because nobody wants to put on paper that they were founded in 2013 and spook all those superstitious PHBs. As a result, the economy will sort of drag along as it was last year with nothing new and exciting happening, possibly even appearing recession or depression-like. People who are working on the new and really exciting stuff are going to hold off their reveal until January 2014, when you are going to see an explosions of awesome come out of nowhere all at once.

On the other hand, people who do start a business this year are commendably not superstitious, and therefore might be worth investing in. Or else they have a self-destructive streak and they would like it to be played out on a large scale.

Take-away prediction: nothing much happens in 2013, shock and awe in 2014
+1 Rank Up Rank Down
Mar 4, 2013
Here is why I believe the market will go up.

In the macro sense, the fed low interest rates and pumping billions into liquidity into the markets will inevitably lead to this formula <= reduced purchasing power of dollar = increased equities prices>. Notice we are not talking real wealth here, just the simple math that more liquid dollars equal equity higher prices.

100% true that historically, retail investors jumping into a market is a sign of a bubble and time to get out. However, past performance is not always a predictor of future performance. The increase in equity prices may continue as long as liquidity is being pumped in.

Also very true that the fed does not yet have a real strategy to unwind its liquidity moves (or at least none stated). An example of the liquidity factor is when a member of the fed hinted at cutting back on QE, the Dow tanked almost 200 points in two days. Bernanke got back on TV the following week and said he intends to keep pumping...markets go up.

Also true observation that with a 2% GDP propped up by government deficit spending (true GDP without government deficit spending would be negative), equities look overvalued with growth over 2%. Again, look at the impact of liquidity on the market prices and that explains it.

The day the fed suddenly announces the end of QE, then look for a 10% to 15% reduction in the markets.
Mar 4, 2013
I believe it was John P. Getty who had this advice for a young man considering putting his money in the market: "My boy, if you do go into the market, promise me you won't get out at the bottom."
Mar 4, 2013
Everyone has an algorithm or strategy to beat the market, and yours is as good as anyone's, because anyone had the right analysis if his prediction came true. However if a prediction does come true people credit the analysis rather than good fortune-- who knows what other, even more-important factors may have been in play? That's why creating a new system, even if it's based on many previous, useful systems, probably has no more chance of big success than most other new systems. An exception might be finding a non-obvious technical pattern that correlates very well with success. But then if you reveal the pattern, people start to use it, to bet on it or against it, and its value will collapse because now it's something everyone is controlling for.
+2 Rank Up Rank Down
Mar 3, 2013
This is called "freedom". You don't need a reason to allow it, you need a reason to forbid it.

So far I just don't see any:
- The current crisis was caused by overly complex investment products and reckless lending. HFT played no role in it.
- Flash crashes are very few and of no consequence for private investors.

The only ones who get bitten are other robotraders and about them I can only say: "So what?"
Mar 3, 2013
Isn't the fundamental reason for having a stock market so companies can raise cash to use in their operations? I never heard a good explanation why it's allowed and healthy for the market to keep a stock for just a few milliseconds.

Couldn't we remove a lot of volatility by saying you have to keep a stock for at least 24 hours before selling it? Or what if we said, you can sell within 24 hours, but then you'd have to pay a 0.1% transaction fee?

I don't get it why we allow opening the market for pure speculation as it seems to run counter to what the system was meant for in the first place...
Mar 3, 2013
From a purely statistical and generally well understood standpoint, Phantom II’s comments below make quite good sense. Problem is, not every certified financial advisor is brilliant or even right. The ones who are/were, are probably rich enough themselves that they’re now in another profession (managing their own money…with some help). The ones that aren’t are still out there. Oh, some will probably hit it right on occasion enough to keep employed. The bad ones will fall by the wayside to be replaced by new ones with a huge difference of abilities. My mother-in-law met a neighbor who is(was?) a CFA working for one of the big companies. He professionally got her into several ‘can’t miss’ opportunities. She told us, my wife and I talked to him and invested some. After a significant time (1 or more years, I forget), one of ours was still messing around, the other up significantly. I took the profits and got out. Both tanked after that. My mother-in-law stayed in, lost a huge amount. The guy now looks the other way when we happen to pass. So yes, see some certified analyst, listen to what he or she says, but remember, it’s your money, not his or hers. So YOU have to keep paying attention. And especially don’t be greedy. I manage our 401k's. Both have been moving up steadily, 2008 made a small dent (very small), and they're doing fine, not great, but acceptable (I'm diversified). But don't listen to me, either.
Mar 3, 2013
I think, indeed from direct personal experience I know, cognac and cigars are still alive and well and living in Sydney, and, I dare say, in all other financial centres.
+1 Rank Up Rank Down
Mar 2, 2013
Could you be persuaded to invest in the chinese economy, particularlarly the IT and spyware sector?

Btw, I take the blame for the demise of the ARM Risc PC and the Psion notebooks (you know, the ones that could run for a month on 2 AA batteries). Both went out of business after I had gotten around to buy something from them.

Oh, and I've busted 2 bakeries, too, one pub and at least one ice cream cafe. I suspect my current favourite pub only stays alive because a few years ago I stopped being a regular there.
Mar 2, 2013
Take a look at Sergie Eisenstein's 1925 movie "Strike". Good depiction of the fat cats who are in a room drinking their cognac and smoking cigars as they plot their next move.
Mar 2, 2013
Take a look at Sergie Eisenstein's 1925 movie "Strike". Good depiction of the fat cats who are in a room drinking their cognac and smoking cigars as they plot their next move.
Mar 2, 2013
Take a look at Sergie Eisenstein's 1925 movie "Strike". Good depiction of the fat cats who are in a room drinking their cognac and smoking cigars as they plot their next move.
+13 Rank Up Rank Down
Mar 2, 2013
Listen, I have a confession to make – I am the one to blame for the economic messes of the last several decades. I do not know whose responsibility it was before me, but ever since 1973 my actions have controlled the world economy. You may remember that was the year of the Arab Oil Embargo. I had just graduated and was looking for a job, and the worldwide economy tanked. Coincidence, I thought.

But it happened again in 1979 with the over-reaction to the Iranian hostage crisis. Car sales plummeted, big layoffs in the auto industry, the economy spiraled downward. Blame me. I had just gotten a factory job at Ford. Sorry.

A similar thing happened in the early 1990s. I was just starting to get promotions and was going to buy cool stuff when the Economy Fates got wind of it. Oh, mea culpa.

Foolish me, ever the optimist -- in 1998 I put my 401(k) funds in the risky stock market option. I think I heard the Golden Laughter of the Gods as I was doing it, but my hearing was going bad by that time. I am so, so sorry. I think I have learned my lesson, now.

Hey, I do not want this responsibility. Somehow this greatness – if greatness it is – was thrust upon me. As soon as possible I will sacrifice a goat to appease this cynical, ironic god that controls me.

You notice how oil supplies have not been a really major problem for a while? You can thank me for this relative stability, because I finally gave up making major personal economic changes. My money is as safe as can be; and though I do not like my job, I will not quit. You are all very welcome.

But what will happen when I retire? Social Security, now that I am ready to tap in, is having big difficulties, naturally. Here we go again! Sorry, my Baby Boomer amigos.

And as I fade into Oblivion, my metaphysical finger will no longer be in the economic dike and humanity will be on its own! But before I go --

Volunteers, anyone? Email me, care of the Dilbert website and we will arrange something.
+7 Rank Up Rank Down
Mar 2, 2013
I'm with phantom II and melvin1 here.
I've got some friends with high emotional intelligence, so they're great for talking about problems or having fun with but because they are good with emotions they are impossible as investors.

In fact, it's even impossible to do their investing /for them/ because at the most unprofitable moment (i.e. durig a crash, when equity is cheapest and one should buy) they show up and demand that you sell and therefore realize their losses. If you try to argue, you get to hear how bad they feel, how much sleep they've lost and that they "just want out".

Btw, here's a nice table quantifying the effect of that behavior: http://books.google.com/books?id=SbIz2gRbrF4C&pg=PA94

The best advice I can give to these friends is, unfortunately, to stay out of the equity markets altogether.

I guess being a good investor is a bit like being a good programmer. Either your brain is wired for it or it isn't.
Mar 2, 2013

Had read this somewhere.
"The only reason we have "experts" on the stock market is that people want to fool themselves into thinking that someone knows what is going on."
+6 Rank Up Rank Down
Mar 2, 2013
" Or do you believe the markets are mostly honest". I can't stop laughing, That is funnier than your comic strips Scott!
Mar 1, 2013
By the way, what is your evidence that the small investor is piling back into the market? Sentiment indicators like that are valuable, but often anecdotes are used instead.
Mar 1, 2013
In _Market Wizards_ they interviewed a number of currency traders who talked about manipulation of the currency markets by governments. The upshot was that manipulation worked only some of the time, and occasionally the manipulators got massively burned when the market refused to do what they wanted. The take away quote: "Nobody is bigger than the market"
Mar 1, 2013
@Melvin1, People often downvote long comments (all over the internet), regardless of the content. TLDR = Too Long, Didn't Read. Many people consider it rude to write a long comment.
Get the new Dilbert app!
Old Dilbert Blog