I think it’s likely that I introduced Bob Farrell’s Market Rules to Remember to the blogosphere (albeit to a smaller audience), as they’d been an integral part of my upbringing in the business and I was eager to share them when I started blogging.  (BR posted them here in August 2008.)

That said, let’s have a look at Farrell’s Rule #9 which states:

9. When all the experts and forecasts agree – something else is going to happen.

With the understanding that it’s early August, that there are almost five months left in the year, that the Trading Gods will frown upon what I’m about to do and that I’ll wind up with copious amounts of egg on my face, I offer up the following look at what the consensus was saying with regard to year-end S&P500 levels just a very short time ago (originally via a Bloomberg terminal and circulated liberally).  I simply do not have it in me to list any individuals’ names; I’ll leave it to the reader to figure out the who’s who.  Caveat:  There may have been updates to these forecasts since the time I first received them, but these were, in fact, the forecasts not all too long ago.  And I recently attended a meeting at which one strategist who’s officially in spitting distance of the mean provided attendees a “whisper” number closer to the high.  Oh well.

(We closed last year at 1257.)

So, the one thing that we could easily have inferred from this data when it was published was that the S&P would not close at (or near) 1400, which is now a cool 17% move from yesterday’s close in the context of an economy that is losing steam by the day.  1600 or 1200, yeah, but 1400, no way.

With that, I humbly ask the Trading Gods to be merciful in their punishment of me.  My intention — to demonstrate in real-time one of Farrell’s Rules — was noble.  Frankly, given our current circumstances, I find the prospect of a 17% gain between now and year-end fairly remote.  But I have been wrong a couple thousand times in my career.  Only time will tell if I should have waited until January 2012 to publish this, but that would evidence a total lack of cojones on my part; I’ll take my medicine at the appropriate time.

Category: Analysts, Data Analysis, Economy, Really, really bad calls, Research

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Bob Farrell’s Rule #9 in Action”

  1. [...] The Big Picture — Bob Farrell’s Rule #9 in Action (which is: When all the experts and forecasts agree – something else is going to happen.) [...]

  2. AHodge says:

    these point forecasts are absurd
    and a uniform consensus is ALWAYS equally absurd.. you cant possibly know that much.
    i used to sit in a dealing room and make book on forecasts wrong
    an 80000 spread for next payroll
    a 200 point spread for yearend S&P for more than 9 mo earlier
    i bet that anyones forecast will not be right within those ranges..INCLUDING MY OWN
    you would be amazed how fast the books built up to where i couldnt lose.

  3. Concerned Neighbour says:

    I would argue a majority of the stock market rally was based on monetary stimulus, and the evidence bears that out. I’ve also argued since day one that this stimulus simply isn’t sustainable because it benefits asset prices more than the real economy, and ultimately could harm the real economy. I believe the evidence is mounting to support that argument, too.

    The Fed has gone too far with monetary stimulus. What’s needed is fiscal stimulus, but Washington blew the first stimulus, and now the cupboard is bare – especially if you’re unwilling to eliminate the “temporary” Bush tax cuts to finance additional stimulus. There yet remain options, but Washington has proven incapable of seizing them. I am very much not a buyer here.

    On the subject of analyst groupthink, with all due respect to BR and the others that post here, I believe most of your colleagues are hacks. Honest, independent and intelligent financial analysts are nearly an extinct species. If you want a real laugh, go back and look at the projections for S&P 500 earnings in the 6 months leading up to the crash. How these people can justify their salaries is beyond me.

  4. franklin411 says:

    The problem for analysts is:

    How do you factor in the reality of an anti-American, Teabag minority willing to send wave after wave of suicide bombers to inflict maximum civilian economic casualties?

  5. AHodge says:

    I d give 17% up at yearend maybe 8% chance, id give 17% down maybe 5%
    make yourself a spread of ranges and fill it all in
    that will clarify your risk thinking

    separately not marking your forecast when market moves always makes you even more ridiculous
    my best story in Oct 2007 Bloomberg does best buy list based on how high forecast above concensus
    i was SHORT 5 of their 10 best buys
    they were all collapsing MTG PMI ABK countrywide
    I actually use their list to select a 6th short
    its one thing to be randomly wrong
    its the ultimate statisticians insult to take someones advice and systematically do the opposite

    BTW the broke mortgage and pool insurers are finally talking bankruptcy and their stocks have collapsed in the last 2 mo. While it is not actual reality news that the maybe 2 trillion of likely claims wont be paid,
    i think its news to a lot of the market
    and thats getting into the selloff now

  6. AHodge says:

    to be clear
    “Bloomberg does best buy list based on how high concensus forecast is above latest actual””

  7. dina says:

    1400 is possible with QE3

  8. Bill Wilson says:

    It wouldn’t be the first time we finished the year with a strong rally. I think things are still good enough this year to justify a year end rally.

    If the S&P doesn’t reach that 1420 median consensus, it will be real time lesson in P/E compression. If high revenue growth is a justification for high P/E ratios, sluggish revenue growth is a justification for low P/E ratios.

    There is no law of physics that says the P/E of the S&P500 must be 15.3. There is no reason it can’t sit at nine or ten for a few years.

  9. tradeking13 says:

    How the hell does Binky Chadha at DB still have a job? 1550? Puh-lease.

  10. dougc says:

    If you want to keep your job forecasting, the best idea is to find out what the historically best forecaster is predicting and then add 2 % , especially if you are lazy or incompetent. If the forecast is wrong you can always say your forecast is almost as good or slightly better than the best economist.

  11. Cynic_FA says:

    Thanks for the great summary of the street outlook. Might be time to get your DOW 10 K hats out of the basement!

    I had several retail investment clients bugging me about not making enough money for the first half of the year. one client even said “Why would I buy a 2% corporate bond when the common stock is paying 2%, and they keep raising the dividend?” The common is down 10% since we had that conversation.

  12. Cynic_FA says:

    dine says “1400 is possible with QE3″

    If you are basing an investment strategy on Bernanke bailing you out, you forgot that he is too busy bailing Europe out.

    Hey – Anyone know why BAC and Citigroup PFD stocks were down 7% – 10% today? (BAC.D, C.W) I told my co-workers (based on absolutely no amount of knowledge) that either Citi or BAC is the AIG of the European debt crisis. Does anyone know in what way C or BAC might be stupid enough to have $100 billion of risk exposure to Europre?

  13. Chuck Ponzi says:

    Cynic…

    Ever considered margin calls as a big culprit?

  14. [...] past week’s market machinations pushed the point even further.  As Barry Ritholtz noted (the chart came from his excellent blog, The Big Picture), Rule #9, from Bob Farrell’s Market [...]

  15. [...] posted here back in early August about Street-wide year-end S&P500 forecasts. I will say that I’ve [...]