Knowledge & Confidence

My suspicion was 'correct' -- NY and Toronto rallied throughout the day yesterday after opening sharply down. In the end, TSX closed down only a few points, while SPX closed flat. Short covering was probably a factor, but two other factors may also have played a role: 1) there seems to be a growing sense that the world is not coming to an end (despite all the crazy talk on Thursday). Maybe all the money the global central banks pushed into the system is having a soothing effect. 2) There has been a lot of speculation that all the quant traders are running the same models (more or less), and as the credit markets crashed they have been forced to reduce risk/leverage wherever possible. This probably has some truth to it -- how many different strategies (real differences, not superficial) can be employed with the same backward-looking dataset? Anyways, perhaps this selling has come to a halt, at least temporarily.

This sets us up for the rally to continue into the first half of this week. However, it seems unlikely to last. Economic fundamentals are still poor. Central banks may be willing to provide emergency liquidity, but I doubt they are willing to cut rates to save the credit markets. Things would have to get REALLY bad before that happened e.g. equity markets down 20-30% in a very short time period. At this point they could justify the cut to themselves by pointing to the likely effects on the real economy.

After reading more of "The Black Swan" over the past few days, I am reminded of the dangers surrounding knowledge and confidence. It is probably impossible to consistently forecast the markets, especially the short-term day-to-day movements. Anyone who claims they can do so is either lying, lucky, or, most likely, never checks their own record.

It is important to keep the limitations of one's knowledge in check and not become overconfident. In the markets, being over-confident is worse than being stupid.

MARKET POSITION: SHORT (2 units)