Is market performance written in the stars?

Hs-zodiac-open-stars1-360x220.jpgSafely predicting movements in financial markets is the holy grail of those who work in the industry. But while we can look to technical charts and the fundamentals of supply and demand, there is one way of reading events that should be probably always be avoided: astrology.

Sri Lanka’s defeated president Mahinda Rajapaksa should know. He called a snap election on the advice of his personal astrologer Sumanadasa Abeygunawardena that went badly wrong.

And as the ex-president of ten years packs his bags, it seems the erstwhile astrologer is keeping a low profile.

“Not all of Nostradamus’ predictions have come true either,” the 63-year-old Abeygunawardena told Agence France-Presse by phone. “There was only so much I could do to help him win, maybe five per cent. But you must have luck to be the president.”

But could we turn astrology to work in the markets? It seems pretty far-fetched, of course, but there is some evidence to support.

Arch Crawford, a trader at Merrill Lynch in the early 60s, earned a solid reputation after predicting the 1962 flash crash.  As an article in The Telegraph relayed, he subsequently investigated how astrology could be used to trade using the book Stock Market Prediction by Donald Bradley.

“Bradley had a mathematical model that predicts the market fairly well,” he told the newspaper. “And does so to this day.”

Astrology could be no less random than choices made based on ‘skill’. Interestingly, analysis of the success and failure of investors – both retail and professional fund managers – suggests there is often an absence of skill in the choices made.

Professor Daniel Kahneman, who won the 2002 Nobel Prize for Economics, explains his book Thinking, Fast and Slow: “Many individual investors lose consistently by trading, an achievement that a dart-throwing chimp could not match.”

He adds: “The evidence from more than 50 years of research is conclusive. For a large majority of fund managers the selection of stocks is more like rolling dice than playing poker.”

In that sense Abeygunawardena is not wrong, whatever ‘system’ you base decisions on, everyone needs a lot of luck.