“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

Laurence J. Peter —

Economists have a penchant for hedged statements; particularly grizzled veterans fully aware of the folly surrounding overly certain forecasts. Peddling predictions is a difficult craft for the intellectually honest, or at least those with half a brain, as the future is always uncertain.

Economists who recognize this frequently harness the phrase: on the one hand, on the other hand. While such waffling may frustrate seekers of surety, it reflects reality. The future is in a constant state of flux and those who fail to acknowledge such wisdom do so to their own peril.

I’m always taken aback when I hear pundits going on about what the future holds with such conviction and certitude. I can hear the money honey (that’s Maria Bartiromo for you youngins) throwing out softballs to her Wall Street guest as I type.

“So, Sir Spanky, what’s the market going to do this year?”

“Well, Maria, we’re going a lot higher. Bank on it. Strong earnings growth in Q4 will propel the S&P 500 past 2175.”

I don’t know what’s worse, the fact that Spanky presents himself as a seer or that the audience actually believes the man knows the future. Fortunately for these talking heads, the public is quick to forget and easy to forgive no matter how many times they make a bad market call.

As traders, we don’t have the luxury.

The previously mentioned phrase, anticipate all potential scenarios, is a great motto for traders. Your analysis should be replete with if-then statements. Take my recent post titled Bear Market Targets for example. In light of the August crash, I threw out a few potential downside targets for the S&P 500. The projections were prefaced with the following qualifier:

In the event the selling raid turns into a full-fledged cyclical bear market, let’s establish a few downside targets.

The scenario I focused on was the most bearish outcome: the correction growing into a full-fledged bear market. Well, guess what? That scenario didn’t come to pass. On the contrary; the exact opposite outcome has materialized. The market has been insanely bullish. Hence the need for contingency plans, or the anticipation of alternate scenarios. If a bear market doesn’t materialize, then I do X, for example.

Here’s another one. One of the most blatantly broadcasted forecasts on Wall Street is that of higher interest rates. The prediction has been making the rounds for years and has yet to fully materialize. Since bond prices, especially long-term bond prices, fall when interest rates rise, one of the more popular plays on the board for capitalizing on higher rates is shorting bonds. Bearish plays on TLT, the out-and-out leader of long-term bond ETFs, is my play of choice.

So my if-then statement would be: if interest rates rise, then my bear calls on TLT will thrive. Unfortunately, the alternate scenario that has plagued bond bears from time to time in recent years has been a sharp drop in rates driving bond prices aggressively higher. To combat such adverse movement, I have another if-then statement in my plan. If TLT breaks resistance, then I’ll add bull put spreads, or then I’ll roll my bear call spreads out in time.

If nothing else, the frequent wielding of if-then statements is the ultimate manifestation of the wise advice that trading success is more preparation than prediction. If you’ve adopted a single handed approach to your market forecasting, I invite you to change your ways by following in the path of the two-handed economist.

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