The Re-Emergence of Perma Bears

One of the features of big market drops is that you get all the Macro-Perma Bears back on the TeeVee -- such as this one from CNBC.

Technical strategist Abigail Doolittle is holding tight to her prediction of market doom ahead, asserting that a recent move in Wall Street's fear gauge is signaling the way.

Doolittle, founder of Peak Theories Research, has made headlines lately suggesting a market correction worse than anyone thinks is ahead. The long-term possibility, she has said, is a 60 percent collapse for the S&P 500.

In early August, Doolittle was warning both of a looming "super spike" in the CBOE Volatility Index as well as a "death cross" in the 10-year Treasury note. The former referenced a sharp move higher in the "VIX," while the latter used Wall Street lingo for an event that already occurred in which the fixed income benchmark saw its 50-day moving average cross below its 200-day trend line.

Nailed it! Except not really. I'm not sure exactly when she started making the call, but per the article, the S&P 500 Index (SPX) is little changed since she made it. For what it's worth, she expects the CBOE Volatility Index (VIX) to ultimately pop to 90, so we have just a tad more to go.

Here's my advice: religiously ignore all these big-picture calls. The best way to get some ink is to make a call that stands out from the pack. This one sure meets that criterion. There are lots of perma bears out there, but I'm hard-pressed to find one with this extreme an outlook.

There's a rather large downside to setting up a portfolio to play for a huge market drop and/or VIX pop. There's a very high probability that it never comes to pass, and you've either foregone the upside in the market or wasted money VIX calls or whatever.

But conversely, there's very little downside in actually making a bold call. The financial media will tend to focus on the call itself, not the timing around it. If you started calling for doom at 180 in the SPDR S&P 500 ETF Trust (SPY) and it goes to 200 first and then crumbles back to 180, you really haven't done too well in the actual investing/trading game. But hey, you called the panic!

There's also a small whiff of "Survivorship Bias" at play here. Let's say you set up a sort of market prognostication tournament with 16 seers. Pair them off in eight head-to-head contests, the winners after a month move on, the losers go home. Do it again with the eight winners. Then again and again, and you end up with the "best" market seer. Does the winner have particular ability to call the market? Possibly. But, it's also possible he/she simply is the "seer" because based on the format, someone had to win the contest.

What if instead of 16 contestants we had 160 market prognosticators making calls at random intervals. Odds are, some of them will get it right. And, those winners now get more attention, and some of them still have it right for the next move -- and so on. Are the ultimate winners experts, or are we simply fooled by randomness?

My point isn't that these people don't have talent, because they absolutely do. Rather, calling some sort of macro-move is a very bad way to judge them and their value to you as an investor.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.