Macro Analysis and Market Application

One of the odder things about doing whatever it is I do for a living is the multi-stage process it requires. It can be at times challenging and frustrating and fascinating and confounding.

The first stage involves attempting to suss out what is really going on in the world. What are the macro conditions like? Inflation, employment, growth, retail sales all add up to an environment of differing interest rates and corporate earnings. That leads to market action that is made up of trend, momentum, internals (a/d, volume, etc.). These in turn lead into a complex interplay of psychology, where sentiment is at various turns rational and at other times irrational and still other times extremely irrational.

From this analysis, we then need to identify what is true, but not yet recognized, and what is false but widely believed.

Ironically, all of the above is the easy part.

The harder part involves taking that analysis, and figuring out how and when to apply it to the markets: What asset class to own (equity, commodities, bonds, cash); what sectors within equities to concentrate; which stock within these chosen sectors to own, when to rebalance portfolios.

And that is before we even start to discuss the timing element of when the analysis will finally be reflected in the markets.


The challenging and fascinating part of this is the intellectual challenges involved. Why is this conounding and frustrating? Its mostly due to Algebra.

Long ago, thanks to my math and science background, I have developed a focus on not the outcome, but the process. That was how all of those math classes got graded: You needed to show the formulas  that led to your conclusions. Anyone could get the correct answer through a random but not reproducible approach. The goal of calculus was to teach the methodology, so that you increased the probabilities you would end up with the correct answer in the future.

Markets don’t quite work that way.

Consider the long list of folks who have been right in their analysis, but wrong in the timing of the market reaction to this; Then think about some of the weaker bullish arguments — there have been an enormous run of absurd arguments, false theories, ridiculous analyses. Regardless, these get overlooked by many as the markets continued upwards. Right answer, wrong process.

I never hear the Bulls argue "Markets go up most of the time, so just buy stocks and tough it out through the weak periods." I recognize the truth of that statement, but I also recognize it makes for a lousy marketing campaign. So instead, we get what passes for analyses like The Fed Model (flawed), Money Flow (spotty record), Random Walk (junk science), Earnings emphasis (non-correlated). 

Many of these strategies have been unequivocally proven wrong — but because their ultimate conclusion was to buy, the erroneous process gets overlooked.

Until now . . .

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Bill aka NO DooDahs! commented on Aug 1

    It’ll be fun to revisit this post of yours in a couple of months.


    BR: I believe what I have written above about the process versus the outcome is true — regardless of whether markets are up 1,000 points, down 1,000 points or at the same levels 6 months from now.

    You obviously missed the main point of the discussion.

    Regardless, I bet you are an outcome kinda guy — so any discussion on process simply doesn’t resonate with you.

  2. Michael M commented on Aug 1


    The futures 4-5 hours ago were horrible. At their lowest point the Dow was down 160 points, the S&P 500 down 19 points and the Nas down 20 points. Slowly we have crept up to what looks like a slightly lower opening, or pretty much where we were a few minutes after the close yesterday.

    I’m suspecting that the smart money late yesterday into the close and overnight went massively short because yesterday was of technical significance and I therefore expect much bigger downside today than futures indicate.

    What is your view of the technical action yesterday and the past ten trading days? At what point, if at any, do you consider the bull market “broken”?

  3. Woodshedder commented on Aug 1

    BR- could you quantify or at least elaborate on what the meaning of “Until now . . .”

    Are you implying that the markets are going to fall more than most think?

    Please give us some numbers, or at least a more detailed conclusion.

  4. Alex Khenkin commented on Aug 1

    Is the bull market broken? Not yet, but the problem is, by the time it clearly is, it is a stampede to get out. Just look at REITs.

  5. Barry Ritholtz commented on Aug 1

    Woodshedder — I am suggesting that as we work our way through this period of volatility, some of the more egregious arguments will be recognized as such. To use Buffett’s analogy, as the tide goes out, we will see who is not wearing a bathing suit.”

    I’ll post an example later today. In a comment earlier this week, someone mentioned a very offensive Charles Biderman quote — I’ll use that, and an excellent response I found to counter it.

    Look for it before lunch . . .

  6. Paulo commented on Aug 1

    Excellent post, you mentioned the sentiment or psych. but that is from the market.

    The difficulty increases when all of that you add all the internal things that we all have that interfere to all of that analysis..

  7. KP commented on Aug 1

    Recognizing a build in potential energy is in fact the easy part. Determining the catalyst for the release of all of that energy is quite another, simply because of the fact that the market is participated in by people who are predictable only to a certain extent.


    BR: Ahhh, a fellow physics fan . . .

  8. The Financial Philosopher commented on Aug 1

    Great post, Barry… You’re right — it’s not the “outcome, but the process” that matters. My comment may be a bit out of place at TBP but one of the luxuries of being a long-term investor is that being “wrong” for a short period of time is absolutely necessary to be “right” at the end of the game. Some of the greatest investors (Buffett, Graham, Miller)would likely agree that, out of every five years, it is quite expected that a prudent investor will be “behind the market” for 12 to 18 months.

    I believe where many Bulls and Bears alike make mistakes is that they perpetually argue their views by displaying their knowledge of their side of the equation without acknowledging their ignorance of the other…

    Even one of the greatest speculators that ever lived, Jesse Livermore, said “There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”

    Markets environments, like the current one, make it fun, challenging and, most importantly, rewarding to be a long-term contrarian…

    Thanks again for the post, Barry…

  9. LAWMAN commented on Aug 1

    Barry, I read this as an attempt to justify the “process” you have been touting for years now…and that your “process” has been right all along, even though you could not “prove” your equation because the “outcome” has been wrong.

    I see a fundamental flaw in your reasoning, though. You have constantly taken the bearish position for what, at least two years now. IMO, your outcome has not been “right” because your process has been wrong. Quite simply, it is clear that your “process” is missing a variable, thus your “outcome” is flawed.

    One of the great things about math is that you get instant verification of your work. If your process is flawed, then you immediately know because your outcome is wrong. When your outcome is wrong, then you scratch your head and go back through your process…..did I add something wrong?…did I not carry a one?….did I completely miss a variable?….

    Or you just keep banging on the table and saying that your process is right and everyone else is just nuts…..

  10. Bill aka NO DooDahs! commented on Aug 1

    I’ve made the argument that stocks go up and are the best buy long-term on that basis at least a half-dozen times, usually while making fun of perma-bears like yourself that predict a crash every year.

    I believe your methods are wrong, AND your outcomes are wrong.

    I use (currently) three different, backtested, statistically methods on SPX price and volume data to provide my guidance as to whether we are a bull market, or a bear market. I’m tempted to pare that down to two. All are saying “buy this.”

    How does one measure methodology? I would put it to you that outcome is a pretty decent measure of methodology, ultimately maybe the only true measure of methodology. Based on your broad market statements over the past four years, I would say your econo-methodology is severely lacking. I would similarly say that anyone with good methods should expect a year, or consecutive years, of underperformance, but to get four years in a row speaks harshly about method (Johnny Hussy, you listening?).

    Your customers are probably glad that you don’t run your money based on your free blog’s writing.

    I remember you speaking of the crash of 1987, and how, in retrospect, you didn’t buy enough then. Today, in a historic down run (how many -5% weeks on the SPX since 1950?), you are trying to scare the rubes that read this blog. Are you really buying, right now, for your “aggressive” managed accounts? Is your fund selling into this, the way your posts would imply that the crowd here should be? What’s your personal cash percentage?


    BR: Your memory fails you. I was in grad school in 1987, and managed no money until the early 1990s.

  11. Lauriston commented on Aug 1

    It’s the Heisenberg Priciple. You cannot simultaneously know the process AND the outcome… pick one and know it well ;)

  12. Joe Klein’s conscience commented on Aug 1

    The Financial Philosopher,
    You are right. Just look at what Buffet has said about the Tech bubble and of that period in general. Those were businesses he didn’t understand, so he stayed away, despite the fact he was missing out on easy profits. Also, look at the late 60’s(I believe). When guys like Gerald Tsai were in vogue. It’s almost like Buffet has an aversion to making money too easily.

  13. michael schumacher commented on Aug 1

    these guys are testy when they are faced with reality. But I suppose it does’nt matter to them that the process was flawed in the first place and it only matters when they are on the wrong end of the decision.

    A microcosmic example would be the options “issue” over at Apple and people’s response to it. If you made money on the stock then it’s quite clear that you are in the camp of “it’s ok because I’M ok and made money on it. You can guess the other results as anyone who could possibly believe that Jobs had nothing to do with a $140m decision that benefited him does’nt really understand the process to begin with. It sort of takes complicity to attempt something like that. But that is a small example……unfortuntley our gov’t is doing much the same thing with MUCH LARGER AMOUNTS.


  14. Woodshedder commented on Aug 1

    Michael, yesterday you intimated that GS borrowing of billions would be enough liquidity to buy a rally. Now, that has (at least in the short term) proved untrue. Where then is the money going?

  15. michael schumacher commented on Aug 1

    Ask the brokers……I’m merely reporting what they get through the BS process called an “auction”…..

    You’re a smart person and I KNOW you can figure out what is being done with it. Try checking for block trades…..LOL


  16. Sammy20 commented on Aug 1

    Ugh oh, BZH might be heading to bankruptcy….the pefect storm might be here!

  17. RR commented on Aug 1

    The financial philospher wrote ‘your process has been right all along, even though you could not “prove” your equation because the “outcome” has been wrong.’

    Barry said clearly:’from this analysis, we then need to identify what is true, but not yet recognized, and what is false but widely believed.’ He may been highlighting the risks in the economy and markets all along, but I think he was also clear that being short early will leave you insolvent.

  18. johntron commented on Aug 1

    speaking of dualities…..the housing/mortgage market is screaming US recession while commodities are shrugging it off.

    Even with increased BRIC commodities demand, the big pig is still us. So will housing mellow out or are commodities the next domino to fall?

    Sounds like a US contagion this time around.

  19. techy2468 commented on Aug 1

    johnton….if USA goes into recession they will be immediately followed by BRIC countries…(3-4 months lag)

    i know that china is dependent on usa for consumer goods and india is dependent on services.

    commodities will also go the same rout….because investment these days are panzi schemes….where you bid each other out expecting to be bought out at a higher price….

  20. Fred commented on Aug 1


    I’ve said many times that I respect your process…it’s rigorous and thorough.

    As far as your outcome, here, we “freebies” have no knowledge of that, and I completely understand why…no complaints here.

    What I would humbly suggest is to occasiionally share some of the stats that suggest when a “outcome prediction” becomes too popular of crowded (as it has “statistically” become now) that panic selling has not been smart.

    The only time in history when it has not paid to buy these kinds of breadth, VIX, put/call, stochastic readings was 1987. That was a rarity.

    By sharing or mentioning these stats, and letting readers “put their own reading” on them may well bring more balance to your work here.

    Buying or selling dislocations in emotion have usually been the smart bet, no?

  21. Stuart commented on Aug 1

    I could not agree more about what your just wrote BR. Well done. ADP just reported 48,000 jobs for the month per their survey. We’ll see but get ready for a 100,000+ with plenty of construction jobs created and the unemployment rate to remain unchanged….. children data of a controlled process.

  22. AD commented on Aug 1

    “It’s the Heisenberg Priciple. You cannot simultaneously know the process AND the outcome… pick one and know it well ;)”

    Technically speaking, the Heisenberg Uncertainty Principle states a well-defined lower bound on the product of the standard deviations of two measurements (usually position and momentum). Specifically, it’s [delta m]*[delta p] >= [Dirac Constant / 2].

    So what it’s really saying is that we cannot know two quantities with arbitrary specificity, but rather that there is a (quite small, though very important at atomic and subatomic scales) degree of uncertainty about one or both of these measurements which cannot be overcome.

    A meaningful comparison would be that we can’t know both the exact value of the S&P500 and the exact momentum (positive or negative) of the S&P500 at the exact same time to 100% specificity. (I may have just ruined the day of several quants – the consolation prize is that unless you are trading in atoms, the difference should be small enough that it’s not worth worrying about)

    The HUP has no real correlation to any process; in fact, Feynman demonstrated that even under uncertainty, you can have a strong understanding of the process and the likely outcomes (sum over paths) with as much precision as is possible.

    Which, I think, is Barry’s point… when the outcome is in, the bogus processes are unmasked very quickly, but some individuals may well have a process that is well-defined and consistent which gives them relatively accurate results.

    Now if you will excuse me, I may or may not have a cat in a box to attend to.

  23. Pool Shark commented on Aug 1

    Much of this boils down to the simple philosophical question:

    Is it more important to be ‘right’ or ‘rich’?

    What doth it profit a man to master market fundamentals if all other investors behave irrationally. The market can remain irrational far longer than one can remain solvent.

    I agree entirely that the hardest variable in the equation is determining market psychology.

    What does it say about the average modern American’s psychology that he buys a house he can’t afford and watches American Idol?

  24. Pool Shark commented on Aug 1


    Did Schrodinger leave his cat with you again?

  25. lauteus commented on Aug 1

    Speaking of Macro…
    Since the dollar is getting pounded the economy will benefit from the export increases and the consumer will get slapped in the face again with higher prices for imported goods (good thing we only import almost everything)

    Sticky seems to be the word of the week for housing prices. Instead of outright denial and articles popping up about how the statistical data is off. Again, for the economy, this issue is being priced into the market. I bet it won’t be long until the increases for any statistic in housing on a Month to Month basis will be cheered. Good for Econ. bad for Consumer.

    Oil prices (and other commodities) are going up. Thanks to our flopping currency… But, as long as it is not included in the data it can be seen as “contained”. Again, good for corporate profits (who cares about margins as long as we see profits baby). Once the squeeze isn’t worth the juice anymore, the prices will be passed onto the consumer (woo hoo)

    As far as the credit issue… Hell, it’s just another bitch slap in the face of the average investor/consumer… the always and predictably forgetful consumer. At the end there will be some chapters filed and the corporations will happily trade egg-on-face for the gains that have been made. I suppose the ones that will get trashed are the investors with pensions or retirement accounts and such… Can you file for a Chapter FU to pay for your retirement?

  26. Pool Shark commented on Aug 1


    And speaking of atoms…

    Two atoms are walking down the street, one says to the other: “I think I lost an electron.” The other says: “Are you sure?” The first one says: “I’m positive.


  27. lauteus commented on Aug 1

    The modern american’s psychology…

    “There is no calamity greater than LAVISH DESIRES, there is not greater guilt than DISCONTENTMENT, and there is no greater disaster than GREED.” ~Lao Tzu

    and they didn’t even have a stock market or walmart back then…

  28. AD commented on Aug 1

    First, I don’t know about the cat! He can never tell me if he’s left it there or not. Secondly, since we’re talking bad physics jokes…

    A neutron walks into a bar.

    “I’d like a beer” he says.

    The bartender promptly serves up a beer.

    “How much will that be?” asks the neutron.

    “For you?” replies the bartender, “no charge”

    I’ll go now.

  29. Pool Shark commented on Aug 1


    If Schrodinger’s cat turns out to be dead, will it still bounce?

  30. pj commented on Aug 1

    Good post Barry.
    Just that I am still not sure that there indeed is a process in the whole madness of the markets. It is all quite overwhelming.
    And could you write something more on what is happenning right now. I frequent some of the blogs, but not much conviction anywhere.

  31. TexasHippie commented on Aug 1

    x^2 runs down the street screaming, “the differentiator is coming!! Run for your lives!”

    e^x looks at him and just shrugs.

    15x runs past a moment later and says “the differentiator is coming!! We’re doomed!”

    e^x just smiles and keeps walking.

    But to his dismay, along comes d/dy.

  32. donna commented on Aug 1

    I love watching the process play out.

    I’m just glad I don’t actually need the money I’ve got stuck in it for another 15 to 20 years or so. ;^)

    Gee, I hope it’s still there and maybe worth something then!

  33. mhm commented on Aug 1

    “Just that I am still not sure that there indeed is a process in the whole madness of the markets. It is all quite overwhelming.”

    Yep. I’m out. Well, mostly and still wondering why I’m not out completely.

  34. daisycolorado commented on Aug 1

    “Until now….”

    Well, at least until about 10 minutes ago, when the Dow shot up more than 100 points.

    When did Random Walk become junk science? I must have missed the memo.

  35. Jim commented on Aug 1

    Wow, tough comments from some …I personally admire Barry for putting it out there every day for us to see. Of course Barry if wrong on occasion …even Buffet has made bad investment decisions. I keep coming back though because what he writes rings true and is insightful.

    To Barry’s point though, I think the tough part is timing. Things ultimately revert to the mean …the tough part though is *when* will they revert. It often comes down to a “black swan” event and/or a psychological tipping point.

    Personally I look for things that don’t seem to add up. Case-Shiller points out that properties are waaaay over valued …but if you shorted REITs prior to January you would have lost money.

    Right now I think PEs are generally too high, but will stock prices correct or rise some more? If you think you know for sure either way you are kidding yourself.

    I think the cheap money we have had for years and the effect on inflated housing prices is going to end very badly at some point …and it will drag the markets down with it. But when?

  36. Winston Munn commented on Aug 1

    Quote: “From this analysis, we then need to identify what is true, but not yet recognized, and what is false but widely believed.”

    Barry, this sounds like quantifying a potential reversion to mean, i.e., determination of over or under value due to widely held false beliefs – it is the mathematics of psychololgy, so to speak.

    As you mention, the tricky part is timing – even when widely known that knowledge may not affect price – it seems the only time price is affected is when widely known knowledge is shown to be detrimental to earnings or risk, as in subprime.

  37. dn commented on Aug 1

    It will be fun to revisit Bill AKA NO Class’s snotty posts in a couple months.

  38. James commented on Aug 2

    until now what??? The story cannot end here. Where is the end of the story? I want to know your process and the results! I’m hook!

  39. Juan commented on Aug 2

    Am thinking that Barry applies a means-ends dialectic, not a mechanical process v. outcomes, understanding that the antagonism of ‘v’ also unites the sides.
    When ‘starting’ from economic fundamentals, it usually helps to recognize that these and the financial compose a contradiction driven unity-in-motion, not some moreless simplistic, though superficially complex, math.

  40. Juan commented on Aug 2


    ‘The cat’ is always dead and alive; the trick is knowing which is weightier than the other, the transforming asymmetries rather than assumed equilibrium(s).

  41. paul commented on Aug 4

    In light of what happened today, can BR repeat “until now….”

  42. A Dash of Insight commented on Oct 12

    Process versus Outcome in Investing

    It is Columbus Day — not the observed day where government agencies and bond traders take the day off, but the real one. Who better to remind us than Art Cashin:On this day in 1492, Christopher Columbus landed at the

Posted Under