To your first point, youâve twisted my logic a little bit. Iâm not necessarily talking about the *actual* information being distorted (even though that does play a role - look at fox news compared to all the other networks during the election) so much as Iâm talking about the market participant acting on what they believe is relevant. The issue then becomes what should and should not be relevant? Who decides what is and is not relevant given that there is so much information out there right now that is unilaterally negative? Letâs take a classic example. We all know the handle âStock_Trad3râ, right? How much of the active investing public do you think thinks and acts like him? Iâd venture a guess but I donât want to sound elitist. To put it bluntly, this character type ignores all information that is contrary to his belief system. His âmirrorâ only reflects the upside because thatâs all he chooses to see. How many people do you think are acting based on the overwhelming amount of negative media? Think of what effect the constant bombardment of negative information is having on the collective? Unless one has a strong character and an objective mind, one is likely impressionable and likely to base trading decisions on what theyâve heard. With respect to whatâs going to happen next week. I donât know. I donât trade based on my beliefs about the future. I am fully automated hence I donât have to look into the mirror to make sure I am being objective. Nor do I pay attention to anyoneâs market forecast. I doubt that even 1% of the trading/investing public has quantified any of their trading decisions, hence my questioning the benefit of their participation in price discovery. As long as people use future beliefs to make investment decisions, we will have bubbles and bursts, i.e. irrational markets. Itâs nothing new and we all know that history repeats itself and that people donât change. However, this time the effect is more tangible due to the recently lubricated flow of information. Couple that efficient info flow with âpoint and clickâ technology; hence I think we have the makings of a new market dynamic, especially during perceived market traumas like this one. The below chart may or may not answer your last question. http://www.ritholtz.com/blog/wp-content/uploads/2009/02/bear-markets-comparison-xlrg.gif Honestly, Iâm just expressing some ideas and trying to initiate an interesting dialogue about what we are all witnessing. The chart above doesnât include Februaryâs almost 10% decline, so a case could be made that we are falling sharper than we have in the past. The question then becomes if we are likely to see sharper drops and sharper rallies in the future even though, technically, the markets have become more efficient and transparent with the advent of âpoint and clickâ trading? This seems contradictory, hence is this the result of our new collective connectivity or is the crisis the mother of all bear markets?
Thanks Pabst, I appreciate the compliment and as always, I find your input valuable. The dumb money, as it used to be called, is now the âholding on to my broken belief systemâ money. Itâs not necessarily dumb anymore, itâs just stubborn and it needs to be flushed out. While I hardly ever make predictions (suffice to say I never trade my predictions), I think another 20-30% decline will do the job. Your comment about some of the biggest moves not being seen on immediate ânewsâ events is true and I think it shows the contradictory nature of the current crisis. While you are right that information was more exclusively held in the âdark agesâ, I would venture to say that information was also likely exclusively held by those with the serious capital. So maybe what we are seeing now is the result of a broader capital base with equal amounts of information âabsorbingâ some of the velocity of this crisis. Whether those âabsorbingâ this sell off are the informed and objective parties is yet to be determined.
You see I am totally discretionary When price is going up â I go long When price is going down â I short I donât care why itâs doing what itâs doing⦠Nor do I care what anybody else has said, or thinks â about why itâs doing what itâs doing⦠Nor do I care/ or listen to - what anyone has said it may / might / or should do Hence my comment about knowing all (or for that matter any of) the news â DOES NOT MATTER WHEN TRADING â to me You see â essentially weâre saying the same thing, and doing (trading) the same way â albeit discretionary vs. system As for speculating on your above statement â if what I just said holds true â then how could I comment (state my oppinion) with any credibility or intelligent thought â because in the more important arena (the market) I know my oppinion does not matter â Iâll just trade the darn thing (the market's direction) My purpose for originally posting was to show how âchasing the newsâ does not provide any value when trading But even though weâre saying the same thing youâre bustin my butt â assuming I donât believe what I posted, and putting words into my mouth I never said⦠I just ain't getting it Redneck
I'm not busting your butt and I understood from your first post where you were coming from. This thread is not about how you or I trade, its about society's current perception of risk versus reward and how the collective chooses to act on the information presented to it. You asked me *how I would trade* given I possessed all the information available and what difference that would make. I said quantitatively and that that's not really the point. You then replied with some garbage about my "reality being a pain to me" or something... This is a simple discussion that you are trying to direct into a area I find boring, i.e. the individual trading strategy aspect. I know how I trade and what effects it does or does not have. What I want to explore is the idea that we are all experiencing a change in the market dynamic that will likely stick with us for the next decade or so.
I'm not trying to direct it anywhere - it's your post - not mine All you had to do is state your discussion intentions and I would have been out - I find it hard to read minds You see as this is a trading web site - I naturally assumed discussion would be about trading - My Bad As per your intended discussion Yes the market dynamics are changing, and will continue to do so for the foreseeable future â it is inevitable as the dynamics of the economy (US & World) / and information availability for same have changed - IMHO But then the market has always evolved (since itâs inception) - nothing new
What I want to explore is the idea that we are all experiencing a change in the market dynamic that will likely stick with us for the next decade or so. also ---- "collective information" ------------------------------------- Forget for a moment about the collective information we can gather from the print headlines and guru's. The market dynamics worth exploring over the internet are the unmentioned, which is, the manipulation of the market by the gov't ie PPT, news releases from the gov't on option expiry day, bankruptcy''s announced over the weekend. Posters on ET are trying to call the time of day when the PPT intervenes. IMO, we had manipulation in the past via stock index futures via changes in margin requirements,well who are the big players with margin? I thought we were in a liquidity crisis, looks like the only big player is the US Gov to move the market. There are probably dozens of people who recognize "sumbudy knows sumpin" we just can't put our collective finger on who or what.
I must admit to feeling somewhat disappointed as I had hoped to see tangible evidence in the form of two charts that unequivocally display the fundamental change in market dynamics that have or are allegedly occuring, something that I observe has failed to materialise. As there is no evidence to suggest a fundamental change has occured I'm left with no alternative regarding the original hypothesis as being nothing more than unquantified speculation, and that assessment cannot be questioned until evidence to the contrary is provided. The laws of supply and demand will never change therefore the "market dynamics" will never change, dynamics themself being defined as change... and as we know price moves up then it moves down (dynamics). The market is in a constant state of evolution and it is always changing, however there isn't any new paradigm unfolding where the laws of supply and demand are changing. Changes in volatility have nothing to do with a fundamental change in market dynamics as there is quite simply nowhere for price to go. Price goes up, then it comes down and it has done ever since the inception of trade, sometimes with a higher degree of volatility relative to another period of time, hence proving that we have seen it all before. Ok, lets refer to âStock_Trad3râ as a generic model to further the "debate". He/she only sees upside (apparently) and has therefore been losing due to the bear market, well, we all know there are speculators who are losing in the markets. The question I pose to you is, "How do losing market participants provide the catalyst for a fundamental change in market dynamics"? Clearly their discretionary capital is becoming if not already exhausted, therefore they have less disposable capital to invest and less influence upon market dynamics. However it must also be noted that there are new participants becoming involved every day due to the rising population, therefore ensuring a continuity of supply. It is possible to argue that a lack of participants is a potential cause for a change in volatility due to the remaining participants primarily being automated, however automation is founded upon the principles that have always existed and that is supply and demand, so why would there be any change in "price discovery"? Don't forget, you also assume the cessation of additional investment from younger traders who are a product of an expanding population, albeit in a credit contractory environment. I suggest that after the 50% decline we have already witnessed, the manifestation of this change in "price discovery" due to the elimination of "irrational participants" that could be defined as a fundamental change would already be apparent. With all due respect, in your post at 03-01-09 08:15 PM, you made the following statement "Investment is a belief about the future." Clearly you appear to be contradicting yourself as you state that investment is a belief about the future, then suggest that you yourself don't believe anything when making a decision due to automation, therefore proving that investment is not merely a belief about the future. What is the definition of a rational market? What is the distinction between a rational and irrational market? The distinction is in the eye of the beholder and this is what underpins supply and demand! If 99% of the investing public who have not quantified their trading decisions are of no benefit to "price discovery", then clearly you believe that a market lacking the liquidity that this 99% provide would somehow be beneficial to the functioning of market dynamics, which is questionable. However, we are still unable to escape from the laws of supply and demand and therefore market dynamics will continue to reflect this within the manifestation of price. Ofcourse, that goes without saying. The laws of supply and demand will never change because if they did (even if they could), "price discovery" would become obvious.
Lets examine the chart I posted as it shows all the major declines for the last 100 years or so. If one examines the magnitudes of the declines with respect to time, one will see that this current decline is greater than all the others except for the 1929 decline (note the chart is not inclusive of the Feb. 10% drop). Also, the slope of the line (the rate of the decline) is slightly higher than that of the great depression. Thatâs quantitative and demonstrative of market dynamic so lets start with this chart for the purposes of furthering my hypothesis. This âsharper slopeâ idea is what has many speculating about this crisis being comparable to the great depression. Do you think we are headed for another great depression? I certainly donât. The fundamental factors arenât there and while there is trauma in the economy, it certainly doesnât seem to be all that catastrophic. Maybe I am in denial about this. Also, I wasnât there during the Depression hence what do I know⦠Anyhow, we have quantitative evidence that volatility is higher now than potentially ever before. Yet you still say that a fundamental change has not occurred. What other factors do you think constitute a fundamental change? While all your facts about supply and demand hold true, the question still remains: are we as a collective more or less rational than we were in the past â and given the answer to that question, how much of the population is now participating actively in the market? If one believes the following: 1. That investors are just as irrational today as in the past. Human nature does not change. 2. That we have more people participating today than ever before. âPoint and clickâ investing. 3. That instant information is easily accessible to all, more than at any time in history â i.e. we are all, to some extent, acting on the same information. Given the above ideas coupled with the âsharper slopeâ then we have the makings of either one of the most irrational bear markets in history, or the Great Depression II. I think the straw that made the market break faster and harder this time is the extent to which âinformedâ investors are acting on their collective beliefs as constantly reinforced by mass media. Which would you choose if you had to - Great Depression II or more people + more information = more irrationality? Iâll side with my half-baked irrationality hypothesis. All that aside, higher general volatility also implies sharper drops and sharper rallies, which is in my opinion a fundamental change in how markets trade. You asked "How do losing market participants provide the catalyst for a fundamental change in market dynamics"? They donât and like you said a new batch come in with every market cycle. When all these losing participants decide its time to get out because all the news they being instantaneously exposed is negative, then we have the makings of a new market dynamic. Itâs the degree of âinstantaneousâ which is the crux of my argument. I donât invest. I trade intra-day only. My systems make no predictions about the future, they simply place high expectancy trades. While this may seem like a contradiction, it is not. Probability and statistics are not belief systems nor do they involve any individual decision making.
The problem we have here is that we as individuals clearly have differing ideals with regards to forming a concise definition pertaining to what a fundamental change actually consists of. You believe that a simple increase in volatility is enough to promote the dawn of a new era, which you define as a fundamental change in market dynamics. I on the other hand look to history and observe volatility through 1987 and again in 2001, and arrive at the conclusion that the fluctuations of volatility are temporary and have been observed many times before and therefore what we are witnessing is not a fundamental change. Whether the "slope" is steeper during the current contraction as opposed to historical contractions is irrelevent in terms of supply and demand and it will have a negligable impact upon everyday trading especially so for the discretionary trader, which is ultimately what this game is all about is it not? I can assess a 1 minute chart where the volatility one day is completely different to the next day, however I don't define each day built upon the 1 min chart as the dawn of a fundamental change in market dynamics. I merely accept that each day brings a chart where supply and demand will manifest in whatever form occurs, irrespective of the difference that increased or decreased volatility brings, and I will be able to trade it 9 times out of 10. This we can agree on to a certain extent especially in terms of stock market analysis. Although, I trade probability on a discretionary basis which requires the process of decision making to occur, as I can see a high probability trade with my eyes and act upon this awareness without hesitation time and time again. This doesn't make me or any other disciplined discretionary trader anymore rational or irrational than an automated trader. On a philosophical level I would suggest that probability and statistics are a belief system, because mathematics fail to assist a humans capacity to accurately comtemplate or fully comprehend the truth of our existence, as truth extends beyond number. Probability and statistics merely serve as a vehicle for technological evolution in terms of practical application. However modern academic dogma has inhibited the capacity for most "educated" individuals to think outside of this mathematical box, and therefore it becomes a belief system due to the conditioned byproduct that is boxed thought. However, that is a rather expansionary topic and is not altogether applicable toward mundane trading conversation.