Thursday, August 20, 2009

What would Adam Smith say?

On days when I write my column, I like to see if I can do some follow up work to it. Sometimes I need to clarify the tone. Other times I need to un-edit my editor's changes. Today, or should I say yesterday, I wanted to do a bit more on cloud charts as that was the focus.

Well, it is holiday season and I am on the road again. After a 7 1/2 drive, I was in no shape to comment on anything especially after the drubbing I took in the market Wednesday. Ugh!

So, rather than talk about cloud charts, which you can yahoo or metacrawl all you want (I refuse to say google, just like I refuse to ask for a kleenex or open the frigidaire) there is something else on my mind.

Something is very wrong in the financial markets. I blogged the other day about stock trading jumping the shark as they actually ran an infomercial with an NFL coach talking about all the technical studies his boss company had - including "moving day averages" (that's a quote). Stock trading is the bubble. So is forex trading. The point is that too many people are doing too many things to try to master the market that the market is going to change the rules of the game.

Stuff is not working the way a free, capitalist market works.

Yes, I know the government is juicing the capital markets. But even without that it does seem that the deck is stacked against regular investors. No, not the little guy who is last to the party. That is and always will be. But even institutions with all their tools seem to be at the mercy of Wall Street financial engineers (or should I say imagineers, a la Disney?).

This market has changed and that is not necessarily bad. What it means is that we must find different tools and if that means a radical overhaul of chart reading, so be it. Breakouts, gaps, moving averages and the likes are not longer cutting it.


Antonio said...

The Market is manipulated.
Buying S&P futures and with opportunistic upgrade
on the economy (Abby Cohen), on sectors and stocks (Google today) Goldman Sachs (and maybe few others) on behalf of Fed impede stock market to come down. Not to mention selective buying of sector leaders (the herd will follow...)

Ramu said...

Mike, do you mean that the technicals that we know now no longer useful? Then, Maybe we should all stop blogging until we find the next successful strategy. Then I guess a lot of technical analysts will be out of job. Clearly this is quite frustrating. We all followed whats out there and took tons of losses and suddenly a revelation that we have to start fresh. What if it repeats?

Quick Takes Pro said...


you miss my point. Technical analysis will always work as long as there is mass psychology to analyze. What has to change is the way we implement the tools and even the tools themselves.

I personally would like to the analyst that builds a better model of what works.

This is nothing new. The markets are constantly changing but what is happening today is deeper than just adjusting for volatility or using log scales or taking intermarket effects into account.

As Antonio said, the market is being manipulated. We need to find tools that can tell us when and how.

Ramu said...

Mmmm..I see the volume is quite low. I observed this same thing last July/August when it traded similar to now. I remember your columns calling for a pullback. I hope it repeats. Looks like it continue to frustrate bulls for another 2 weeks. Man, I sound repetitive. How many months do we have to wait?

Antonio said...

As a subscriber of Quick Take Pro I must say that the fundamental thing I admire in Mike is his coherence with a bear market scenario. (But why not under march low?). It's quite disturbing to listen (and read also) to all those technical parrots who explain with superficiality the uptrend of the market (I mean people who write on Barron's, Marketwatch and so on).
Mike, instead, is one of the finest technical analyst I have ever read. It's only a question of time before a strong sell off will open the dances...

William said...

I think it's uncanny how bullish investor sentiment is... Under Dow theory the first leg of a bull market investors should be still very pessimistic. Right now sentiment would be more suggestive that we've already reached the top, where there is manic buying and money managers are suffering from "performance anxiety," and are buying at any slight pullback. A veeerrry dangerous atmosphere to be a buyer in. Not for me.

dgroch said...

Here IS the point. The market exists to discover prices, i.e. make public information out of the private information (preferences) of all active participants. As a consequence price reflects the complex web of beliefs of its participants, who in turn may have many varied preferred holding periods.

When he made his inquiry into the nature and causes of the wealth of nations, Adam Smith didn't uncover the mystical natural order of the market. Instead he issued a prescription, which just happened to be intellectually satisfactory to his contemporaries.

A widespread political doctrine has, as a rule, two very different kinds of causes. On the one hand, there are intellectual antecedents: men who have advanced theories which have grown, by development or reaction, from previous theories. On the other hand, there are economic and political circumstances which predispose people to accept views that minister to certain moods.

Vis-a-vie supply and demand, all that matters is that it is a widely held belief, and insomuch as it is consequently an operative cause of action for those who participate in markets we must accept that the belief is self-perpetuating. By believing in it, people unwittingly create a perception of reality that is largely self-supporting, and further it conditions them to actively search for evidence of those self-fulfilling expectations.

Were every market participant to believe so ardently in the "truth" of fibonacci retracements on a daily candle I'm almost certain the effect would be identical.

Objective reason is an illusion. As a consequence, all it requires for a belief to be "true" is that it be supported widely and perhaps thought irrefutable.

Imagine if every punter at the Kentucky Derby placed their bet on the apparently irrefutable communal belief that only EVEN NUMBERED horses can win races... it would considerably alter the market's pricing dynamics.

And so it is with beliefs and all markets.

We are presently in a period in which the beliefs of market participants are changing. Some are questioning the validity of buy & hold, some argue for more quantitative "econophysics" approaches, some are returning to tradition technical analysis.

All that matters is that the beliefs and holding periods are changing, thus so to are the patterns in price. As Darwin would advise you, adapt or perish.

Ramu said...

Nice analysis. Given the fact that markets getting this complicated, maybe its just does not make sense for individual investors to do all this analysis and take a decision. Neither they should follow anybody's suggestion. Seem like no one has any idea whats going on and everybody has their own theories. Its good we had this rally. Atleast, I learnt a lot of new lessons. How everybody makes money except the individual investor? poor guys like me.

Saoirse said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


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