I’ve referenced a couple of overlay charts recently that have predictive value only if you believe that history repeats itself. And that’s a hard sell. Yes, there are boom and bust economic cycles, but they are notoriously difficult to time and rarely have repeating causes or contours. Yet it is so seductive to see squiggles move in sync even though they may have no explicable relationship.
Technical analysis, of course, has to assume some version of a repeating history. Its claim is not so much that history repeats itself but that human beings repeat themselves. That is, human psychology in some generalized form is relatively constant; investors and traders are inclined to respond to certain sets of circumstances in ways that are more or less predictable. The old fear and greed stuff sliced and diced in innumerable ways. Of course, this model presupposes that large groups of individuals—retail investors, institutional investors, hedge funds, etc.—are interacting in an honest casino. If the dice are loaded, all bets are off.
Anyway, back to the question of whether history repeats itself and whether overlay charts make any sense. One reason I decided to venture into this intellectual morass was that I watched (and yes, I admit, saved) the 1987 PBS documentary on Paul Tudor Jones before it was removed from YouTube for copyright infringement. We see the Sancho Panza of the firm running historical correlations and plotting them out ever so slowly and painfully with primitive technology. In the documentary he compares the Dow of the 1980s to the Dow of the 1920s and predicts a rally into 1988 followed by a sharp decline (perhaps a 50% retracement), most likely in March of 1988. Well, that didn’t quite work out. The crash of October 1987 is emblazoned in every trader’s brain. On the other hand, the monumental success of Paul Tudor Jones makes the critics of historical recurrence (assuming that he ever really traded this way) seem like pathetic pedants. By the way, Paul Tudor Jones is out with another call—that the market’s climb has been a bear-market rally and that “record government spending may be forestalling another slowdown and market selloff.” (Bloomberg, Sept. 1)