The Gambler's Fallacy

When the Dow broke 8000, it was a question of why, which begs the question.

When things do not make good sense and there is the variable of human caprice involved, the question becomes, "why not?"

There is only one good reason for the Dow to retrace to nearly 10k and technically suggest a secular bull market without fundamental support: because the money was there to drive it.

The money available to drive equities into a technical-looking bull market is largely money consolidated by the recessionary (deflationary) trend. This is net worth literally lost and gained in zero-sum from a plurality of small investors (including the unemployed who invested their labor at a net loss) to a few big financial players.

(For the unemployed with a lot of debt and no savings, the negative equity was reversed positive with the sudden macro reversal into liquidity crisis. Their credit score is ruined, but that is largely a measure of insufficient income. It is a detriment suffered all along and is to be included in the total amount of money that was "irrationally?" leveraged into crisis.)

Leveraging into a bull market trend with recessionary tendencies is not an irrational exuberance (nor was the previous round of overleveraging into a general liquidity crisis). It is a rational, technically measured means to ends.

Small investors riding the current upward trend are gambling, and because the technicals call for a continued bullish trend, the sentiment is established for a likely buy after a dip. They are being set up for continued consolidation.

Sentiment can be made a function of technical indicators, assumed inherently rational and true, to produce an outcome that is deemed irrational--"surprisingly"exuberant, or emotional--in retrospect. It all seems so technically rational at the time the regression is unfolding.

The technicals are too easily manipulated to be reliable unless you are the manipulator, and that is a function of allowing consolidation of value to win over pluralism. For the plurality, investing becomes a game to be played rather than a vehicle for preservation of value and growth, and the game is rigged so that the house always wins.

Since the technical measures assume the probability to be a function of random variables, and the technique of manipulation--of surprises--fits the property of random reversals, it would seem the technical indicators would be the only way to go. That plays right into the manipulator's game.

The tendency to rely on the law of averages is very strong because the short direction of the trend is largely dependant on how the retail investor is positioned. If the big players cannot manipulate the trend and the technicals that indicate it, then they will not play the game and "risk" a deconsolidation of the capital. The empowering determinant that wins the game would be at risk. (The outcome, keep in mind, cannot legitimately be considered winning if it is rigged, so rigging the market entails a legal liability--a gamma risk that must be politically managed).

For the technical analyst in a constant bemusement of unindicated reversals, or surprises, in a consolidated (unpluralistic) market in which the fundamentals do not much matter, the law of averages is a reliable constant of last resort. The market is "due for a correction" defines the gambler's fallacy. It is not a matter of if, but when, and the long wave is the most reliable technical indicator to avoid the allure of the fallacy.

Analytically, the best technical indicator is to recognize that it is not a free market. Reversals are easily induced from the consolidation of capital.

The different assessments offered by different members of the Federal Reserve board recently indicates why the short-wave technicals are unreliable.

The non-fundamental bull market will be reliably reversed in the longer trend with a re-inflated dollar which, while improving the macro fundamentals, will cause a reversal in equities because it is being driven with money not being borrowed for economic growth, but the accumulation of the capital.

The distribution phase of the long trend will force interest rates up, causing a fundamental reversal (correction) of equities prices, and the law of averages will be at that time the reliable constant.

The surprising reversals that consolidate value, both micro and macro, are the result of deceptive practices that the concentration of value makes possible. The correction is the emergence of the truth. Thus, we have the saying, "the technicals do not lie."

Technical corrections do more than suggest the truth in a retrospective regression. It projects the future and a responsibility of knowing what the proper course of action is.

The technical analyst has a responsibility that goes well beyond individual profit. The reversal of fortune that causes massive unemployment and untold suffering is the resonsibility of the knowing to prevent, not to just predict and capitalize on.