Why I Ignore Most Indicators

You’re familiar with "indicators" – the many and sundry data points that analysts point to as evidence of everything from an impending stock market crash to the end of a bear market in pork bellies.

Together with their charts and the equivalent of well-worn copies of the I Ching they will tell you with utmost certainty what’s going to happen next.

The thing about all indicators is that they’re eventually wrong – and so for the purposes of investing, they’re almost always useless. Knowing when to use them is more important than knowing how.

I have a copy of the I Ching, the ancient Chinese book of divination written by four of China’s most revered scholars, Fu Xi, King Wen, the Duke of Zhou and Confucius. And it’s a very interesting book. It’s beautifully written with many poetic turns of phrase and insightful commentary on the human condition: just like any ancient holy text.

But I don’t run my life by the drawing of the yarrow stalks (that’s how the Taoists use the I Ching: by drawing stalks to see which passages to read and interpret), nor do I lean very heavily on indicators in the market to decide how to invest.

I prefer to look at things how they are today. If tomorrow brings vastly different facts, then I can adjust my outlook.

But the world markets rarely turn on day-to-day events. Rarely as in: almost never. Even cataclysmic events like the Fukushima earthquake/tsunami/meltdown have minimal effects on the market over relatively short periods of time.

So if day-to-day events rarely move the markets, why would I sift through the minutiae (like drawing yarrow stalks) in order to find out what’s going to happen next?

Bull markets are like a locomotive with a thousand laden box cars behind it. They start off slow, and the people in the box cars hardly notice. As the locomotive picks up speed, more and more of the box cars inhabitants wake up the fact that they’re indeed moving.

Eventually, all the inertia is overcome, and the train gets up to full speed.

But for most of the ride, the people in the box-cars will come up with every excuse, tale, lie and distortion to explain why the box cars are not moving. Maybe the ground is moving. Maybe the wheels are just spinning. Maybe the earth changed course, so it feels like they’re moving.

But most people just don’t believe – until it’s overwhelmingly obvious and undeniable that the train is moving.

Then it goes too fast and derails – setting the stage for another bull market to begin.

These bull markets take a long time to get started – and for the vast majority of their uptrend, most investors laugh, then scoff, then deride, then demean and finally admit their existence. After they admit it, it’s a matter of time before they pile in.

Now we’re in the stage of the commodity bull market where most people are at least willing to admit that gold, silver, oil, copper, coal, wheat, corn – etc. are all generally more expensive today than they were yesterday. Many of them are still kidding themselves about why that might be. Maybe it’s speculators. Maybe it’s the ETF market. Maybe it’s price-fixing at the Chicago Commodity Exchanges.

People still think that the rolling locomotive is due to pull a u-turn any day now. So they won’t invest. But they don’t understand bull markets. If they did, they would know that bull markets don’t make u-turns.

For a speeding secular bull market, day-to-day indicators are all but useless. It’s best to just enjoy the ride. You can pop your head out the window every now and then to see if we’re headed into a hairpin turn, but I simply don’t believe we’re imminently close to the end just yet.

I’m still buying commodities and commodity stocks – and I think you should be too.

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