This Stock Market Decline has been Foretold Months Ago. It's all in the Data

"These outsiders saw the giant lie at the heart of the economy, and they saw it by doing something the rest of the suckers never thought to do: They looked." ~ The Big Short.





In the beginning of the movie 'The Big Short', Jared Vennett talked about four outsiders in the world of high finance who predicted the credit and housing bubble collapse before anyone else did. They shorted the securities involved in the bubble and ended up making a great fortune. How did they do it? They looked. Looked at what? The data. In one part of the movie, you can see Dr Micheal Burry analysing the subprime mortgage data which was where he uncovered the hidden information about the housing bubble in 2008.

In early March and late October, I wrote about how DIYQuant system successfully predicted the two major market downturn this year that sent the US stock indices plunging more than 10% from their highs. You can find the posts below.

1. How my system predicted the recent downturn? By looking at the data objectively
2. Once Again DIYQuant System Predicted the Market Reversal

After the second post in late October, the market whipsawed for a while and eventually gave way, plunging around 20% from their highs, sending S&P500 and NASDAQ into the bear market territory.





I have warned about the impending decline since August when the system's proprietary MArket-wide Trend Analysis gave a reversal signal. From now on, I will name this component as MATA. Why MATA? MATA means 'eye' and used to refer to the police. Hence MATA's job is to keep an 'eye' on investors and make sure they stay at the right side of the market. By the way, MATA has been backtested and validated with almost 17 years of historical market data.

MATA analyses a large dataset of stocks to identify their current market trends and infer the most probable market's subsequent movement By utilising a large dataset, it is relying on the Law of Large Numbers, that is, if a large enough sample of stocks is exhibiting a certain behaviour, it can be concluded with a high degree of certainty that the whole market will manifest the same kind of behaviour eventually. (You can also check out this post on how Pareto principles come into play as well). This information is not obvious from looking at the market indices (since the indices are capitalisation weighted and 'controlled' by a few big caps) or listening to financial news or stock analysts. That's is why I like to refer to these hidden movements as undercurrent. By the time the indices started to react and you hear it from the news, it is already too late.





Normally, when I warned about such market reversal, it would be met with lots of skepticism since the news, professional analysts, gurus, social medias and others are still singing about how good the economy is and many were still talking about buying the dips, that I have missed a good opportunity to buy into the 'ever raging' bull market. Check this out, this news was in late July 2018.

Just for fun, I posted below phrase in some of the social medias. It got some attention!.

Even as a retail investor, obtaining financial data to analyse is not difficult as lots of these data are readily (and some freely) available in the web. There is a lot of potential as it enables you to uncover unknown correlations and hidden patterns not available in the mainstream medias (or came too late). It will give you an extra edge in your investment. The difficult part is you have to know what to look for and you probably need some knowledge in programming and computer/computational science.

Data is king. Start embracing it.


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