Monday, February 6, 2017

SPX Update, and How Our Brains Block Us from New Information

One of the reasons so many scientists struggle to produce decent science is that our brains, left to their own devices, work in a fashion that prevents it.  Once we pass childhood, our brains automatically attempt to fit all new knowledge and experience into preexisting paradigms (which has led to expressions like: "You can't teach an old dog new tricks!").  This tendency can be overcome, but we must consciously and intentionally work to counteract it.  Unfortunately, most people are simply unaware of how their own minds work, and don't know how to counteract this tendency -- or even that they should be working to do so.

This is why scientists repeatedly try to fit new (sometimes contradictory) evidence into existing and known frameworks, instead of seeing that the new evidence might disprove an existing theory (or at least call it into question).  This leads to scientists essentially ignoring new evidence -- well, they don't exactly ignore the new evidence, what they do is shoehorn it into the existing framework via speculation that there must be some random, heretofore undiscovered, "thing" missing that will allow the new evidence to fit comfortably into the existing theory.

In other words, when a piece of contradictory evidence shows up, many scientists indulge in flights of fancy and imagine additional evidence that doesn't exist, in order to reconcile the old theory with the new evidence.  This imaginary new evidence then, paradoxically, actually causes contradictory new evidence to strengthen their belief in whatever popular theory they favor -- instead of doing what it should do, which is cause them to question the entire theory and framework.

You see, that's just how our brains work: They first attempt to understand anything new in terms with which they are already familiar.  So if one doesn't ever move past that knee-jerk first effort, then new evidence is not seen for what it truly is, and is instead seen as supporting evidence for the familiar.  This is why physicist Richard Feynman said, "The first principle is that you must not fool yourself -- and you are the easiest person to fool."

Our brains tend to work this way because, in some situations, they have no choice.  We are constantly attempting to cram an infinite amount of information, from an infinite universe, into a finite vessel (our brains) -- which is impossible.  Some of that information invariably ends up cast asunder and lost.  It's like trying to fit the Pacific Ocean into a Dixie cup.  You simply can't do it.  The key is to understand and remember, at all times, that all you really have is a cupful of saltwater, and not confuse yourself into believing that you actually have the entire ocean in there. 

Even on subjects we can comprehend and fit inside our finite brains, it's important that we do not confuse our models of reality with reality itself.  Reality will virtually always be "bigger" (will contain more information) than our models. 

These are some of the reasons why humility is such an important trait in a good scientist... but it's such a rare trait in humanity in general, that we instead end up with a lot of egos who prefer to have "the answer all figured out."

So we end up with few truly new discoveries.  Instead we get a whole bunch of people working to cram every piece of new, possibly revelationary, evidence into supporting the existing paradigms.

I mention this because it's something I was discussing with my teenage daughter (who wants to be an astrophysicist) over the weekend -- and as I was pointing out some of our weaknesses as humans, it got me thinking about how we engage in this same sort of thinking with the market.  So, I thought that bit might be worth sharing, as another warning about how our biases can cause us to inaccurately reframe, or to entirely miss seeing, new information.

Moving onto the charts, the near-term bear case for SPX is shown below:

No change to the bigger picture:

In conclusion, if bears can hold the all-time high, they have a shot at a decent near-term correction.  Do keep in mind that this is not expected to be anything other than a correction, though, and that the longer term outlook still remains bullish.  Trade safe.

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