Harry Potter And The Financial Room Of Requirement

Includes: DIA, QQQ, SPY
by: Gary Jakacky


Ever wonder where incorrect market forecasts end up?

There is a special room at Hogwarts castle for such things.

Expect a few more bearish forecasts to be dispatched there soon.

Fans of JK Rowling's Harry Potter series are most certainly familiar with a unique room at Hogwarts, known as the Room of Requirement. In one manifestation, it is also known as the room of hidden things:

"The room which appears when someone passes the Room of Requirement needing a place in which to hide something. The room is huge, resembling a cathedral with large, high windows, with piles and piles of junk and items that Hogwarts students have hidden in there over the centuries. The objects in the room range from books to joke items to weapons and beyond..."

And beyond? Hmmmm....

Now I know where all those bearish forecasts and charts go.

Like this one: haven't seen it in a while, have you?

And what about this one?

The argument is that you should be terrified that profit margins will fall, dragging stock prices with them.

Despite being ripped to shreds in this article a year or so ago, this chart resurfaces sometimes, only to vanish when challenged.

To summarize the article referred to, any one even slightly familiar with the market's performance since 1950 would see that declining profit margins have had no impact on stock prices over the long run, and vice versa.

Bears never let a bad idea go, however. Consider this one:

I guess the argument must be that since we are in a world economy, maybe U.S. profit margins as a percentage of world GDP might be a more useful indicator of stock price performance. Sigh. Here we go again: historical facts can be so annoying! Look at a long-term chart of the S&P 500 or its tracking fund, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY):

  • Margins fell from late 1964 to late 1968. Despite a swoon with the 1966 credit crunch, stock prices over this period? Higher.
  • Margins fell from 1977 to 1986. Stock prices over this period? Higher.
  • Margins fell from 1997 to 2001. Stock prices? HIGHER. By the way stocks started falling in 2000, a bear market which persisted for nearly 3 years; even after margins began to recover. An indicator that is wrong in both directions! One only a permabear could love.
  • And yes, margins fell in the second half of the previous decade, as did stock prices. My apologies, permabears. Your indicator is right 25% of the time!

Not a day goes by that some bearish article or indicator grasps the mind of the financial media:

Stocks hit another record high on Wednesday but you'd never know it from the headlines. Far from dancing in the streets pundits and young investors are focused on a 130-year old "sell-signal" possibly shaping up based on ancient technical indicators.

It's the latest in a series of ominous comparisons. Who can forget last year's repeated "Hindenberg Omen"? Once that theory went up in smoke it was replaced by a 1929 meme.

Source: Yahoo Finance, April 3rd 2014!

Expect all these charts and articles to remain in the "room of hidden things," or if they are not already there, to be dispatched soon.

Disclosure: I am long XLK, IHI, XLV, XLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Harry Potter fans are warned that many permabears are masquerading as bullish analysts by clever use of the polyjuice potion.