I love to read the material from two excellent quant services to which I subscribe:
Since I am a visual trader i.e. I trade relying on my ‘understanding of the structure of the market’ and verified chart patterns, I find well researched, digital content very useful. On many occasions, their information has provided either an angle I had not considered or a pattern I could use as a setup.
But in this environment i.e. a rising probability of a full fledged 12-month (yearly trend) bear market, we need to exercise care with quant studies. The reason is this: statistical studies need to compare apples with apples i.e. in using past studies to provide a statistical edge, we need to ensure that the past sample is at least similar to the present environment.
So here’s the point.
If we are in a full fledged 12-month bear market, we need to go back to all the way back to the 1929 to 1932 for a comparable environment; but, most data bases the quants use do not go that far back. From what I have seen, most go no farther back than 1982 (when the most recent 12-Month Bull Market began). Occasionally some go back to the 1966 to 1982 era. The problem is even this bear was not of the same size as the one we are probably in.
So what does this mean for quant studies (at least as far as I am concerned)? I’ll take oversold readings with a grain of salt, as I will with buy recommendations. And, most importantly, I’ll use the studies as a way of avoiding myopia for a bullish case.
Figure 1 is a monthly chart of the DJIA since 1885 courtesy of The ChartStore.
Figure 1 DJIA Monthly