This piece has philosophical elements, so mercifully, I shall keep it very brief. The most
popular form of analogy in the financial markets is currently the price action overlay which
is used to compare similar price behaviors from different time periods with the idea that
the prior data series may provide very useful information concerning the future direction
of the current series. The hot one now is to compare recent years' SPX price action with the
lead up to the 1929 crash. I have been using the 1932 - 37 period as an analog for the 2009 -
2014 interval for both the economy and the stock market.
The Cambridge U. philosopher John Wisdom had a good rule for the analogy, to wit: Analogies illuminate but mislead. Analogies are not identities. A good analogic comparison may be
quite compelling, but there are always differences between the subjects. Some disparities are
small and obvious and others can be large and veiled.
When you study price overlay comparisons, you should not just look at the precision of fit.
You have to go much further to review all of the essential fundamental and technical factors
that make the overlay compelling as opposed to being merely random or arbitrary. This process
can be very informative and helpful for thinking about trading tactics and investment strategy
so long as you weigh the weaknesses and disparities the analogy implies and stay ever
mindful that there may be a veiled difference that will collapse the accuracy of the price overlay
the very next day.
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