Posts Tagged ‘efficient markets’

The Dominique Strauss-Kahn Case and Your Investments

By Brett Arends

There are some simple lessons from all this. The Dominique Strauss-Kahn case hammers them home.

We should never assume the crowd, or "everyone else," or the market is right or even rational. Five hundred ill-informed opinions don’t amount to a hill of beans.

We should always listen to what contrarians have to say especially when they sound most ridiculous, and especially when they are being shouted down. We should never trust any judgments reached quickly.

In reaching our own conclusions, we should fight the urge to join the crowd. We should take our time, do our own homework and make up our own minds. There is no hurry.

We should always be willing to change our minds if need be. This is the hardest thing to do. We constantly have to remind ourselves that we could be wrong.

Full article here: The Dominique Strauss-Kahn Case and Your Investments – SmartMoney.com.


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A MONKEY ECONOMY AS IRRATIONAL AS OURS

A MONKEY ECONOMY AS IRRATIONAL AS OURS

Courtesy of The Pragmatic Capitalist

Smiling Chimp

As markets have evolved over time and financial theories have progressed humans have become increasingly confident in the systems we create and the world we live in.  Entire generations of investors have become convinced that markets are stable and efficient. We have come to believe that computer models can accurately predict markets.  On the contrary I believe most of the systems we create are highly complex, inefficient and chaotic.  The markets are one of the last refuges of natural selection (see here):

“The investment world is the civilized version of natural selection. It cuts to the core of every emotion imaginable.  When Joe Schmo goes to work for 25 years straight in an attempt to create a better life for his family and suddenly sees his life’s savings going down the tube because Lehman Bros went bankrupt you can’t possibly expect him to react rationally in such an environment.  This is no different than the man whose family is attacked in the middle of the night.  Do you expect that man to react rationally when everything he lives for is suddenly in harms way?  Do human beings make rational and efficient decisions in chaotic scenarios?  Even more important, will 1 million humans working in tandem make efficient decisions all within the same system?  No, the majority of them will make highly inefficient decisions.  “Mistakes” as we like to call them.   We all make them.

If we have learned anything over the course of the greatest mean reversion in stock market history over the last 24 months it is that markets are HIGHLY inefficient.  Why? Because the humans that write the algorithms are using flawed theories and the emotions upon which these trades are placed are not psychologically efficient.”

Despite our evolutionary leaps and bounds I believe we are not so far removed from our animal brethren when it comes to survival instincts. When confronted with complex decisions we make mistakes, we panic, we turn to our animal instincts which scream: SURVIVE AT ANY COST.  And nowhere is this more apparent than it is in the most complex facets of our lives.  Markets are highly complex systems and have become directly tied to important facets of our lives.  In many regards it is the last place most human beings should be residing. …
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Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question

Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question

Courtesy of Tyler Durden

Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming ‘cut to commercial’ to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of  seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise  models of short term trading volume fluctuations likely are increasingly inapplicable."

In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism. In the process, as demonstrated by a Hurst Exponent gravitating increasingly further away from 0.5 (i.e., Brown Noise territory), the Markov Process nature of stock trading is put under question, and thus the whole premise of an efficient market has to be reevaluated. Simply said: HFT has been shown to affect the fairness of trading.

The paper is, needless to say, a must read for everyone who has an even passing interest in stock trading and market regulation (alas, yes, that would mean the SEC, and Congress). And while one of the key qualities of the paper is presenting the history and implications of High Frequency Trading, and its rise to market dominance primarily as a result of the revision…
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Goldman’s Stock Crushed… All the Way to Last Month’s Level

Goldman’s Stock Crushed… All the Way to Last Month’s Level

Courtesy of Econompic Data 

By now, most of you have heard that Goldman Sachs was charged with fraud. So has Goldman’s stock taken a hit?

As of this writing they are down 14% on the day, all the WWWWAAAAAAYYYYY back to March 2nd levels.

goldman sachs

So is Goldman more valuable today after being charged with fraud (given the new economic / regulatory outlook) or last month pre-charge?

And people still claim the market is efficient… 


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Goldman’s Stock Crushed… All the Way to Last Month’s Level

Goldman’s Stock Crushed… All the Way to Last Month’s Level

Courtesy of Econompic Data 

By now, most of you have heard that Goldman Sachs was charged with fraud. So has Goldman’s stock taken a hit?

As of this writing they are down 14% on the day, all the WWWWAAAAAAYYYYY back to March 2nd levels.

So is Goldman more valuable today after being charged with fraud (given the new economic / regulatory outlook) or last month pre-charge?

And people still claim the market is efficient…


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THE UNCORRELATED RETURN MYTH?

THE UNCORRELATED RETURN MYTH?

Courtesy of The Pragmatic Capitalist

Dragon painting

I came across this interesting paper (which can be found in its entirety below) the other day, while perusing Paul Kedrosky’s website, regarding uncorrelated returns.  The basic premise of the paper was that there is no such thing as uncorrelated assets. The author conveniently cherry picks the last 36 months to prove his point. Of course the last 36 months can easily be described as unique if not an outlier. Many have been quick to come to the conclusion that the last 36 months not only disprove the efficient market hypothesis, but also disprove the theory of uncorrelated assets.  This is highly flawed in my opinion.

Let me begin to dissect this issue from the beginning (without getting bogged down in too much mundane theory).  Anyone who is a regular reader has likely taken the time to read the “about us” section on the site.  If so, you know that my investment theories aren’t just some cookie cutter “fill the  Morningstar box” approach.  I believe the efficient market hypothesis is one of the greatest tricks ever played on the investment community.  Any market is nothing more than the summation of the decisions of its participants.   Markets, by definition are highly complex dynamic systems that are susceptible to chaos.  To assume that the summation of these decisions is somehow efficient would mean that the decision makers as a whole are efficient.   While this might be true to some extent, human beings (and even the algorithms written by humans) are guaranteed to be inefficient decision makers in a chaotic system.

The investment world is the civilized version of natural selection.  It cuts to the core of every emotion imaginable.  When Joe Schmo goes to work for 25 years straight in an attempt to create a better life for his family and suddenly sees his life’s savings going down the tube because Lehman Bros went bankrupt you can’t possibly expect him to react rationally in such an environment.  This is no different than the man whose family is attacked in the middle of the night.  Do you expect that man to react rationally when everything he lives for is suddenly in harms way? Do human beings make rational and efficient decisions in chaotic scenarios? Even more important, will 1 million humans working…
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Zero Hedge

Supreme Court Saves Obamacare Again After GOP Challenge Rejected

Courtesy of ZeroHedge View original post here.

The Supreme Court on Thursday rejected a GOP challenge to Obamacare, upholding the Affordable Care Act for the third time.

In a 7-2 decision, the Court found that Texas and 17 other states lack legal standing to sue, as they had not suffered a direct injury, according to the New York Times.

The Justices did not touch on the larger issues in the case, however, namely whether the majority of Obama'...



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Phil's Favorites

Justice Department's Investigation of Dodgy Archegos-Style Accounts at the Wall Street Mega Banks Is Likely the Cause of Plunge in Trading Revenues

Courtesy of Pam Martens

By Pam Martens and Russ Martens: June 17, 2021 ~

On May 26 Bloomberg News reported that the U.S. Department of Justice had opened an investigation into Archegos Capital Management and its bank lenders. Archegos is the family office hedge fund that had blown up in late March, causing a total of more than $10 billion in losses to mega banks including Credit Suisse, UBS, Morgan Stanley and others.

Archegos had obtained leverag...



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Chart School

Australia to enter a very sad period - Update

Courtesy of Read the Ticker

Lets add some dates to the bearish forecast of the ASX200.

Previous post on the subject and a more detailed Ewave construction can be found here.

SHORT ANSWER

The vertical light red shaded area (chart 1) is the T Theory forecast for the final price top (end of B wave). This period is some where between Nov 2021 and July 2022. This zone is the confluence of equal time cycles as presented on the chart. Notice how this note refers to a extreme price top and not a crash or bear market starting date. Price can consolidate for some time after a extreme high is posted. 


...

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Politics

The Ukraine Fallacies (with Victor Rud)

 

The Ukraine Fallacies (with Victor Rud)

Americans are confused about the history of Ukraine. That's just how Russia wants it.

Courtesy of Greg Olear, at PREVAIL

Greg is the author of Dirty Rubles: An Introduction to Trump/Russia 

...

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Biotech/COVID-19

The FDA's big gamble on the new Alzheimer's drug

 

The FDA's big gamble on the new Alzheimer's drug

Do the benefits of approving a drug before confirming it works outweigh the potential costs? monkeybusinessimages/iStock via Getty Images Plus

Courtesy of C. Michael White, University of Connecticut

The Food and Drug Administration set off a firestorm of debate when it approved a new drug, aducanumab, for Alzheimer’s disease v...



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Promotions

Live Webinar with Phil on Option Strategies

 

June is TD Bank's Option Education Month, and today (Thursday, June 10) at 1 pm EST, Phil will speak with host Bryan Rogers about selling options and various option strategies that we use here at Phil's Stock World. Don't miss this event!

Click here to register for TD's live webinar with Phil.

 

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Digital Currencies

Crypto: Congress Dawdles as $1.7 Trillion Con-Game Goes Unregulated, Threatening Reputation of U.S. Markets

Courtesy of Pam Martens

If you want to get your hair cut outside of your home in the United States, the job has to be done by a licensed worker at a regulated business. The same thing applies to plumbers, electricians, home inspectors, real estate and insurance agents. They all require a license and are subject to regulatory scrutiny.

Likewise, commodities like corn, sugar, wheat, lumber and oil are all traded on regulated exchanges which are overseen by a federal regulator.

But, for reasons that have yet to be explained to the American people, when it comes to the $1.7 trillion cryptocurrency market – which is effectively a con-g...



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Kimble Charting Solutions

Crude Oil Cleared For Blast Off On This Dual Breakout?

Courtesy of Chris Kimble

Is Crude Oil about to blast off and hit much higher prices? It might be worth being aware of what could be taking place this month in this important commodity!

Crude Oil has created lower highs over the past 13-years, since peaking back in 2008, along line (1).

It created a “Double Top at (2), then it proceeded to decline more than 60% in four months.

The countertrend rally in Crude Oil has it attempting to break above its 13-year falling resistance as well as its double top at (3).

A successful breakout at (3) would suggest Crude Oil is about to mo...



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ValueWalk

Managing Investments As A Charity Or Nonprofit

By Anna Peel. Originally published at ValueWalk.

Maintaining financial viability is a constant challenge for charities and nonprofit organizations.

Q4 2020 hedge fund letters, conferences and more

The past year has underscored that challenge. The pandemic has not just affected investment returns – it’s also had serious implications for charitable activities and the ability to fundraise. For some organizations, it’s even raised doubts about whether they can continue to operate.

Finding ways to generate long-term, sustainable returns for ...



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Mapping The Market

Suez Canal: Critical Waterway Comes to a Halt

 

Suez Canal: Critical Waterway Comes to a Halt

Courtesy of Marcus Lu, Visual Capitalist

The Suez Canal: A Critical Waterway Comes to a Halt

On March 23, 2021, a massive ship named Ever Given became lodged in the Suez Canal, completely blocking traffic in both directions. According to the Suez Canal Authority, the 1,312 foot long (400 m) container ship ran aground during a sandstorm that caused low visibility, impacting the ship’s navigation. The vessel is owned by Taiwanese shipping firm, Evergreen Marine.

With over 2...



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The Technical Traders

Adaptive Fibonacci Price Modeling System Suggests Market Peak May Be Near

Courtesy of Technical Traders

Our Adaptive Fibonacci Price Modeling system is suggesting a moderate price peak may be already setting up in the NASDAQ while the Dow Jones, S&P500, and Transportation Index continue to rally beyond the projected Fibonacci Price Expansion Levels.  This indicates that capital may be shifting away from the already lofty Technology sector and into Basic Materials, Financials, Energy, Consumer Staples, Utilities, as well as other sectors.

This type of a structural market shift indicates a move away from speculation and towards Blue Chip returns. It suggests traders and investors are expecting the US consumer to come back strong (or at least hold up the market at...



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Lee's Free Thinking

Texas, Florida, Arizona, Georgia - The Branch COVIDIANS Are Still Burning Down the House

 

Texas, Florida, Arizona, Georgia – The Branch COVIDIANS Are Still Burning Down the House

Courtesy of Lee Adler, WallStreetExaminer 

The numbers of new cases in some of the hardest hit COVID19 states have started to plateau, or even decline, over the past few days. A few pundits have noted it and concluded that it was a hopeful sign. 

Is it real or is something else going on? Like a restriction in the numbers of tests, or simply the inability to test enough, or are some people simply giving up on getting tested? Because as we all know from our dear leader, the less testing, the less...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga

  • Data on nonfarm payrolls and unemployment rate for March will be released at 8:30 a.m. ET.
  • US Services Purchasing Managers' Index for March is scheduled for release at 9:45 a.m. ET.
  • The ISM's non-manufacturing index for March will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the latest week is scheduled for release at 1:00 p.m. ET.
...

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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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