Saturday, November 9, 2013

Fooled by Logic

It's a celebrity deathmatch: the philosopher versus the physicist. The former is Nassim Taleb (who has featured on this blog a few times), the latter is new (to me): Didier Sornette. Sornette's work at the Financial Crisis Observatory applies log-periodic power laws (LPPL) to prices, including stock market indicators. Bottom line: Sornette says you can predict 'black swans', Taleb says you can't.

John Hussman has applied LPPL to the S&P 500 and gets this:


Of course, the proof is in the pudding: how good is LPPL at predicting stocks? On September 27th Sornette called a peak in the Tesla stock price (NASDAQ: TSLA) using an LPPL indicator. Sure enough, TSLA peaked on September 30th, and as of yesterday stood at 30% below its peak.

It looks like 2014 is going to start with a different kind of hangover...



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