4/14/2015 The only way to avoid illusions is to stop looking at them

Sector Model	XLU	-3.28%
Full Model	Date	Return	Days
UVV	12/2/2014	23.39%	133
JOY	12/8/2014	-24.71%	127
RS	12/11/2014	-1.79%	124
AGCO	1/23/2015	6.96%	81
SSYS	3/3/2015	-9.44%	42
PWR	3/9/2015	1.34%	36
BHE	3/31/2015	0.29%	14
CBI	4/2/2015	4.45%	12
DECK	4/2/2015	1.33%	12
MTZ	4/9/2015	-2.17%	5
(Since 5/31/2011)
S&P	Annualized	12.09%
Sector Model	Annualized	22.30%
Full Model	Annualized	19.65%
S&P	Total	55.55%
Sector Model	Total	118.02%
Full Model	Total	100.30%
Sector Model	Advantage	10.22%
Full Model	Advantage	7.57%
	Previous	2015
S&P	53.06%	1.63%
Sector Model	122.60%	-2.05%
Full Model	101.13%	-0.42%

 

The Sector Model continues to consolidate around its benchmark:

 

It’s a strange pattern – expected, but a bit too well behaved.

The good news is that the model does indeed perform as expected by back-tests.  The strangeness is how it’s hovering almost too exactly to that expectation.  No back-test is that good.

This would be about the time that a market technician would announce “it’s going to make a big move to break out [one way or the other]!”

Well, duh.  The current tightening of the pattern is merely an accident of the moment.  We are noting that it is tight at the moment because we are picking a tight moment to look at it.

I make this “point” of sorts to paint a broader picture of the problems of technical analysis.  If you look for a pattern, you’ll find one.  And if you don’t find one in one stock or market, then you’ll look in another.  A common form of chart watching is to look for a trend.  If you see a stock retreat to a rising trend line then it is likely to pop off of it to the upside (or so the idea goes).  If not, you put your stop loss just enough under the trend line for you to get out without too great of a loss.

The problem is that stocks only look like they are going to pop up from a trend-line when you find a stock that’s been popping up from its trend-line.  You ignore those that haven’t been – because, hey, that wouldn’t be a trend.

The pattern is an illusion.

In truth, stocks have to be measured by the money behind the price.  For fundamental investors, that money is money in the business itself: growing cash flow, book value, earnings, sales; low debt.  If the company is gaining more money than the stock in price, then there is a reason to expect the price of the stock to catch up.  Doesn’t always happen, but at least there is something behind the price other than some amorphous trend.

In the same way, technical measures should be price against money flowing into an industry or sector.

Both fundamental and technical measures should be price against an inflow of money: fundamentally into the company and technically into the sector.

The rest is illusion – patterns and trends most of all.

Tim