Why we use historical studies and market statistics to help us trade and invest

We demonstrate a lot of historical studies and market statistics here at Bull Markets to help form market outlooks. These data-driven studies are very useful for trading and investing. Here’s why.

Data-driven over emotional

Too many traders and investors like to “guess”. For example:

  1. “I think the tax cuts are bullish for stocks”.
  2. “I think rising interest rates are bearish for stocks”.
  3. “I think Trump’s actions will cause a bear market”

This is all just speculation. Without data-driven studies, there’s absolutely no evidence to back up these assertions!
These guesses are all just dogma, and we all know that many seemingly “common sense” statements aren’t actually true! For example, common sense dogma assumes that when bond rates rise above the stock market’s dividend yield, investors will shift from stocks to bonds, so stocks will fall. This clearly isn’t true (see study).
Emotional predictions often result in “confirmation bias”. This means that investors and traders see what they want to see. They believe what they want to believe. A pre-existing bearish investor will think that rising interest rates are bearish for stocks. This belief is not grounded in reality (see study).
History tells us what reality is. If you think about it, humans learn from history from the moment they’re born. An adult knows to be careful around sharp objectives because he has been cut before by a knife or scissors. He learned from his past. An adult knows to be careful around hot objects because he has been burned before. He learned from his past. So why should traders and investors learn from the market’s past? Afterall, the market is just the sum of all human BUY and SELL decisions.

History has patterns

When they say “there is nothing new under the sun”, they don’t mean that there aren’t any new innovations. The world is constantly changing. “History rhymes” means that human psychology doesn’t really change. Cycles exist for a reason. Patterns exist for a reason.
We are looking for historical patterns when we conduct statistical studies. This allows us to make reasonable predictions about the future. These predictions won’t always be right, but at least they will give us an edge over someone who’s just blindly believing in dogma. After all, there is no absolute right and wrong in the financial markets. Trading is all about probability.
For example, let’s assume that Event X has happened right now. A historical study will look at historically, what happens next to the markets after Event X occurs? Does the market go up or down? How much does it go up or down?
We want any edge we can find in the markets. And historical studies provide us with a statistical edge.
Some traders assume that you can’t use historical studies just because “certain events have never happened before in history”. That’s true. For example, QE on such a massive scale has never happened before. QT (quantative tapering) has never happened on such a massive scale before.
But these are all just FORMS. Their underlying substance has repeated itself over and over again in history. QE is just another¬† form of monetary easing. QT is just another form of monetary tightening. Massive monetary easing has happened before, regardless of whether it’s a bull market or a bear market. Massive monetary tightening has happened before, regardless of whether it’s a bull market or a bear market. The FORMS of certain events are constantly changing. But the underlying substance behind these events is the same. QE is meant to ease. QT is meant to tighten. HOW you ease or tighten changes over the years. The HOW does not matter.
We don’t need to look for exact replicas throughout history when conducting historical studies. We just need to realize that certain SIMILAR events have caused certain SIMILAR outcomes in the markets.

No study is perfect. That’s why you need to conduct multiple studies

Remember that no historical study is perfect. Rarely will all the historical cases in a market study be 100% bullish or 100% bearish. And even if all the historical cases are 100% bullish or 100% bearish, the present case might be the first case to violate that pattern.
That’s why we always conduct multiple studies. We use multiple studies from different angles to make a general prediction as to whether the market will go up or down in the future.

Studies help you improve your model

Sometimes you will stumble across a finding in your market studies that blows you away. I have done this in the past. When this happens, you can use the indicators in that study to improve your trading model.
No model is perfect. There is always room for improvement, and constantly conducting quantitative studies will make your model better and better.

Leave a Comment