Gold tops $4,500, Japan stabilizes, U.S. data in focus— what’s moving markets
Aaron Brown recently wrote a careful analysis of some popular charts that lacked the needed context. As often happens, his excellent work received some attention, but probably not as much as the original post. He deserves more recognition. That is the purpose of the Silver Bullet Award.
For several years I have highlighted work that represents strong, factual analysis and is not influenced by popularity or page views. One must be like the “Lone Ranger” so I called it the Silver Bullet. Trying to get more recognition for these first-rate posts, I am now highlighting them in a new and separate series (rather than inclusion in my regular weekly updates). I hope that readers and past winners will join me in highlighting this important work.
This Week’s Award – Aaron Brown
One of the most popular market topics is crash risk. The idea that stocks are fully valued and upside is limited seems to be a required part of any current commentary. More and more popular work claims that a crash may be imminent.
Graphics have a tremendous power on readers, regardless of the actual relevance. Context is required. Enter Aaron Brown!
In a carefully nuanced response he looks at longer-term results. He also objects to the time for the ending of each chart. He shows the dramatic change of extending it a bit. To appreciate his work, you need to read the entire post – and I hope you will! Meanwhile, here is an example.
Brown summarizes, in part, as follows:
For those inclined to see patterns, the takeaway is that it’s not really the slow-build-up-sudden-crash suggested by the original charts. Rather there are periods of general uptrends, which tend to have relatively low volatility around the smooth orange line, interspersed with level or down periods, with much more volatility both up and down. I’ve never tested that rigorously, but it doesn’t strike me as a bad qualitative description.
He also does a careful analysis of comparative drawdowns – a key element in evaluating risk and reward. There is an excellent and helpful table.
Takeaways
This sharp contrast in charts illustrates some key problems for the individual investor who seeks solid information.
- Articles that emphasize a continuing trend seem less interesting and less “actionable.” Who cares about advice to stay the course?
- Articles that provide dramatic warnings capture attention.
- Charts that select short time periods and have big curved lines suggesting the future have inordinate power.
There is specific advice here: Do not over-estimate market risks from charts without context!