I've been spending a good deal of time lately studying up on economics and investing as it relates to the past and present state of the investment environment. I feel that I have drawn some conclusions that may offer all of us peace of mind during the uncertainty that defines the present markets.
I've noticed lately that many of you seem to have been feeling pressure related to being on the wrong side of the market using the COT strategies. It seems that for the most part, the dominate concern has not been with the COT system itself, but the timing of the COT system. I believe that as the world economies have been accelerating over time, investing our time in attempting to use historical market data to find flawless entry/exit points might not be the best use our time.
If you note the progress of economic evolution over the course of history, a trend exists that makes much more sense if you analyze it via the power of compounding. Much like the compounding effect of returns reinvested over time, the investment of human innovation and experience follows the same "rolling snowball" effect. Using this logic, to me it seems that attempting create a timing system based on what has occurred decades in the past will probably more than likely serve to disappoint than offer profitable timing. Although history repeats itself, it seems to be the history of human emotional reactions to adversity and sudden change that repeats itself; the actual markets and related price levels at those times that have caused such emotional repetition are not to blame. Who knows? It could very well be possible that the equity markets could climb slowly in a sideways pattern for years, until some indicator becomes so blindly obvious that the masses cannot ignore it. A market move of any magnitude is unique to its own time period, which leads me into my next point.
I’d like to discuss a basic concept in economics that everyone probably remembers from school. Recall the Latin term ceteris paribus, which means, “With all other factors or things remaining the same ". In economics we use this term when making a prediction using variables to explain indicator relationships. The catch is that while we can make a decent prediction about how two variables such as GDP and income may be positively related, this relationship is based on holding all other economic variables (and there are many!) constant. Thus what may have worked as early back as the 1990s for market predictions may not hold a whole lot of value today.
Today, we know globalization is taking steam as Corporations have to look abroad for growth, having realized that American consumers are financially bent over and cannot continue spending on credit long term. At the same time, our government deficit rises to higher and higher levels, the balance of trade remains unbalanced, and the dollar continues to gradually lose value relative to foreign currencies.
Given the current environment it sure seems that we'd all be best off by sticking to some sort of mechanical trading system such as the COT. The COT is attractive because we can bet that the "smart money" will not be the ones making emotional buy/sell decisions. As we step into the Information Age success will belong to those who can make logical decisions, while failure will be a common occurrence of those who think emotionally. As Larry has said, money management will ultimately determine our success, not timing.