Quote from wavel:
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 knowâ¦
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.
