Can astrology predict financial markets??

Venice astrological circle; credit Wikimedia

Astrology in finance?

In a previous MathInvestor article, we mentioned how absurd it would be if someone offered predictions of stock or bond prices or cryptocurrency rates based on astrological signs.

Consider for a moment that financial market prices are based on a confluence of many thousands of factors worldwide, including developments in science and technology, changes in consumer sentiment and preferences, changes in prices of production, public health emergencies (e.g., Covid-19), political developments, competition with other financial instruments and even changes in weather. These prices are negotiated electronically, on behalf of millions of investors around the world, on computers in large, sequestered data centers. Each day, highly trained mathematicians, statisticians, econometricians, and computer scientists, labor (with varying degrees of success) to ensure that their organizations’ sophisticated computerized trading operations generate statistically significant profits.

Also consider that the movements of the Sun, Moon and planets, along with the backdrop of stars and constellations in the night sky, have been predictable based on known physical laws for centuries, and are known much more accurately today by scientists armed with high-precision data collection equipment. Further, no physically real effect could possibly connect planets, stars and constellations, which are millions, billions, trillions and quadrillions of kilometers away, with highly interconnected trading and analysis operations, performed in closed rooms out of sight of planets and stars.

So surely no person with even a modicum of scientific training would place any credence in such predictions of financial markets based on astrology?

Yes, people really do offer and believe astrological predictions in finance

Sadly, today there is, if anything, a boom in those offering and relying on such predictions. Several such financial astrologers were highlighted in a Washington Post article, dated 13 June 2021.

One person mentioned in the article, who uses TikTok videos to reach her audience, has amassed over 1,000,000 followers. As an example, earlier this year she read bitcoin’s “chart,” using its creation date, 3 January 2009. In a video, she declared

New moon in Capricorn, January 13th, looks big for bitcoin. … Little before that … Saturn will join the bitcoin Mercury exact by degree on January 11th, which looks like some corrections with Mercury and Saturn. It could be news about something that leads to a drop momentarily. But with this new moon, sun moon Pluto, right on top of bitcoin’s Jupiter, this is like atomic-level new beginning.

In other words, this astrologer suggested that the position of Saturn and Mercury might indicate a drop in value, but Jupiter and Pluto indicates that the price of bitcoin would rebound from any correction and continue to rise. “It looks like such a bull run.”

Another astrologer who focuses on cryptocurrency, including bitcoin, wrote on Twitter in 2019:

Macro Economic: Why are astrologers so worried about the Saturn/ Pluto conjunction of 2020 ? Because the Saturn/Pluto cycle has correlated with major political, economic and cultural crisis. breakdown of existing structure and change. Important Saturn/ Pluto years were. 2/ …1914 w/ Beg of WWI, 1931 w/ great depression and run on the banks (and trade war!). 1947 w/ Start of the cold war, 1965 w/ height of the cold war & Vietnam war. 1982, w/ deep recession and 2001 w/ burst & the events of 9/11 and rise Al Quaeda 3/ Next one is JAN 2020 and some possible events are a deepening of the the trade war with China & cycle shift w/ US -China as major geo political rivals. Possible formal impeachment, possible recession and economic crisis, election year and possible unexpected black swan events.

Other examples include here and here.

Are we using pseudoscience too?

Before chuckling too loudly at astrologers and those who follow them, perhaps those in the finance community need to ask themselves if they are not also using forms of pseudoscience in their work. Some areas that deserve particular attention include:

  1. Technical analysis. Although the terminology is different, “technical analysis” is every bit as pseudoscientific in today’s markets as astrology. Does anyone really believe that low-tech, chart-eyeballing analysis of “trends,” “waves,” “breakout patterns,” “triangle patterns,” “shoulders” and “Fibonacci ratios” (none of which withstand rigorous statistical scrutiny) can possibly compete with the mathematically sophisticated, big-data-crunching computing programs, operated by successful hedge funds and other large organizations, that troll financial markets for every conceivable trading opportunity?

    It is particularly galling that major brokerages and financial news organizations, including (just in the U.S.), Charles Schwab, Merrill Lynch, Bank of America, Fidelity, E-Trade, Barrons, Wall Street Journal, Bloomberg and MarketWatch, often promote technical analysis, or at least provide convenient platforms and tools to pursue technical analysis. But in any event, it is clear that in spite of its hype, technical analysis does not work in the market. See this previous article for additional details.

  2. Day trading. As we explained in a previous article, another unpleasant truth is that day trading, namely frequent buying and selling of securities by amateur investors through the trading day, does not work either. Study after study has shown that the large majority of day traders lose money, many with spectacular losses; only a tiny fraction regularly earn profits. For example, a 2017 U.C. Berkeley-Peking University study found that even the most experienced day-traders lose money, and nearly 75% of day-trading activity is by traders with a history of losses. See this previous article for additional details.
  3. Market forecasters. The record of market forecasters is, in a word, dismal. According to Hickey’s analysis of market forecasts since 2000, for instance, the average gap between the median forecast and the actual S&P 500 index was 4.31 percentage points, or an error of 44%. In 2008 the median forecast was for a rise of 11.1% The actual performance? A fall of 38.5%, i.e., a whopping error of 49.6 percentage points. Similarly, Nir Kaissar lamented that the forecasts have been least useful when they mattered most. Jeff Sommer, a financial writer for the New York Times, recently summarized the dismal record of 2020 stock market forecasters as follows: “[A]s far as predicting the future goes, Wall Street’s record is remarkable for its ineptitude.” Own our study of 68 market forecasters found accuracy results no better than chance. See this previous article for additional details and discussion.
  4. Doomsaying and zoomsaying. Sadly, doomsaying and its opposite, which one might term “zoomsaying,” are also all-too-common staples of the financial world. In a previous article, we listed numerous eye-catching headlines from the financial press, mostly warning of cataclysmic declines in financial markets worldwide. One prominent economist warned, in 2016, we are very probably looking at a global recession, with no end in sight. Another writer, in 2018, warned the next bear market will be the worst in our lifetime. A third, also in 2018, warned stock market will plunge more than 50%; another predicted a drop of 60%. But moderate to severe corrections are the inevitable fate of all financial markets. For example, during the 2020 Covid-19 market panic, financial markets worldwide lost 40% or more, before quickly recovering. But what is the point of constantly spouting warnings of downturns or upturns, when, statistically speaking, there is no scientifically solid basis for such predictions?

What should investors do?

One should not be too surprised at these findings. For one thing, they are a straightforward implication of the efficient market hypothesis (see also this report and this interview): in an era where markets are dominated by large, mathematically sophisticated, big-data-mining players, it is impossible for relatively unsophisticated forecasters and investors to consistently beat the markets, whether they rely on astrologers, crystal balls or “technical analysis.” True, the efficient market hypothesis has weaknesses, notably the fact that psychological factors often come into play in financial markets. But a superior grasp of mass psychology effects in financial markets can hardly be assumed by professional investors, let alone by individual investors, so this point is rather academic.

So what do writers such as Sommer recommend for ordinary retail investors? Sommer suggests that the majority of individual investors would do well to simply follow the advice of Vanguard Funds founder Jack Bogle, Berkshire Hathaway founder Warren Buffett and Dimensional Fund Advisors co-founder David Booth: invest in one or a handful of low-cost index funds, selected according to a sober analysis of appropriate risk and time frame, perhaps with the assistance of a qualified professional, and, most importantly, hold these investments for the long term.

As David Booth commented, “We don’t try to forecast the future. … We have no ability to do it. Nor does anyone else.”

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