The way many in the financial media look at market analysis has always seemed a paradox to me. There was always a focus on celebrity and the big call. But when those calls were wrong, the pundits were allowed to explain what changed as a reason their forecast — often made with certainty and bluster — was wrong. It was as if they were saying, “I wasn’t really wrong, things just changed.” Certainly some of these factors could have been anticipated. Since they were being presented as forecasters, it is in their job description to anticipate these things.
For years at Futures/Modern Trader we focused a lot of our attention on systematic futures traders. This group of traders and trading strategies have always been suspect in the larger equity-focused investment world. The business media love to follow the “market guru;” the guys (and they were usually guys) with knowledge and inside dope. Technical systematic traders were viewed with suspicion. Perhaps it was simply a suspicion of the futures world, which had always been viewed skeptically. These technicians looked to forecast where the market would go based on where it had been and in defining and spotting patterns that through diligent research had proven, on occasion, to repeat.
In this forecasting issue we discover that this scientific approach is gaining a following beyond its traditional systematic alternative investing world. In “PRS Group: The world in 2017” (page 22) Garrett Baldwin describes how research firm PRS Group uses a quantitative approach to evaluating geopolitical risks throughout the world. Their outlook is not based as much on insider knowledge as PRS’ ability to collect and breakdown thousands of data points of information.
In “Winners by Unanimous Decision” (page 26) Baldwin describes the latest advancement in crowdsourced data. Unanimous A.I., founded by Dr. Louis Rosenberg in 2014, combines real-time human predictions with software algorithms that group participants together as a collective swarm. Participants also rate the conviction of their forecast, which is measured by the algorithms to create an ultimate forecast. Initial results of this “human swarming,” has been very encouraging.
Speaking of pattern recognition analysis, we asked our friends at EdioSearch to compare 2016 market results to previous 12-months periods in the hope of providing some guidance as to what will come next (see “Probabilities-Projections,” page 20). It is how they came up with our projection for the Dow by the end of 2017.
Of course, the advantage of data-driven systematic type forecasting is that it is detached from personal egos. If the numbers indicate a certain position, you take it. When it is wrong — which it will be — you get out. It is not a failure of forecasting, but simply a statistical probability. Humans — especially ego-driven experts — like to be right, and sometimes have difficulty acknowledging being wrong, and this can cause them to turn what should be simply a bad call or poorly timed trade into something much worse.
If your research indicates you have created an edge — something simply that has proven to be right slightly more often then wrong — and you build robust risk management around your execution of that edge, then you can trust the system as a whole. Your value as a forecaster is not tied to the performance of each forecast as it might be for fundamental analysts basing each trade on their knowledge of a market or market sector.
The events of the past year have highlighted the threats from international hackers and the importance of cybersecurity. In this issue, we didn’t simply attempt to point this out, but we provide actionable guidance for what looks to be the most important and perhaps profitable investment sector in the immediate future. In “Buy cybersecurity stocks” (page 34), Tim Summers breaks down several stocks that are poised to advance based on the growing demand for advanced security systems. In “Three ways to tap into cybersecurity growth” (page 38) we present the analysis of Michael Robinson, a cybersecurity expert, on how to approach investment in the sector for 2017.
Finally, what would a forecast feature be without a forecast? We polled our contributor base to get their take on where major market sectors will move in 2017 and the factors that will move them (see “Our experts’ projections for 2017,” page 30).