Prediction Markets Market Predictions

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Everyone's always looking for a crystal ball for the stock market. When you're trying to predict the market, perhaps you should look at a marketplace for predictions called Intrade.

Intrade is a prediction market where traders take a long or short position on the likelihood of a future non-sports-related event. Its ability to accurately predict future events is quite remarkable. The prediction markets not only correctly called the outcome of the 2004 and 2008 presidential elections, it correctly called the 2004 electoral results in every single state and correctly called all but one state in 2008.

What are the odds?
Intrade traders bet on popular financial topics as well. Given Intrade's record of accurate predictions, Intrade's recent stock-market-related predictions deserve some credit.

Intrade Prediction (year-end 2011)

Chances

DJIA (on or above 11,000)52.0%
Gold futures (on or above 1,600)51.2%
S&P to rate Greece in default53.0%

So there you have it. It's a coin flip whether the Dow Jones Industrial Average (INDEX: ^DJI) will finish the year on or above recent market levels.   

But despite all the bearish sentiment, the prediction markets only give a 9% chance the Dow plummets below 8,000 in 2011.  

What about gold? Like the Dow, the prediction markets give gold roughly a 50/50 shot of finishing the year above $1,600 per ounce and a 75% chance of remaining above $1,500. Currently, the prediction markets place a 30% chance gold bursts through $2,000 per ounce by year's end; this offers a glimmer of hope for investors in SPDR Gold Trust (NYS: GLD) and other gold-related investments after the recent gold sell-off.    

How about S&P declaring a Greek default by year's end? It's anybody's call at 53%. Behind Greece, the "most likely to default in the Europe" prize goes to Portugal, at 18%.

Other Intrade predictions
Of other items of note, BP (NYS: BP) shareholders can breathe a sigh of relief. The prediction markets believe last year's oil spill no longer threatens to sink the company. Intrade places only a 1% chance the company files Chapter 11 before year's end.

Prediction markets even have some good news for Netflix (NAS: NFLX) shareholders. Despite a recent cut in company projections, Intrade currently gives Netflix a 75% chance of maintaining 25 million or more subscribers by year's end. 

So how about the 2012 presidential race? As of this moment, chances are Barack Obama loses (53% chance) with the president's likely opponent being Mitt Romney (47.2% chance).  

The bottom line
Prediction markets, much like lowly investment writers, aren't a completely reliable source of information. However, they can serve as a valuable tool in the investment process. 

At the time this article was published Fool contributor Adam J. Crawford does not own shares of any company mentioned in this article. Motley Fool newsletter services have recommended buying shares of and creating a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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