Dec

21

Divergences. To what extent do divergent bond and stock moves in a month, especially the last month of the year, predict the future?

Relativity. I once saw a proof of the theory of relativity that was based on a standard rate problem with two boats going up and down a stream with the current going against them. I wonder if a similar proof could be based on the relation of options of varying distant months and strikes, taking account of the predicted increase in futures prices between consecutive quarters. The problem is similar to the relation of yield curves to each other expected in the future. Speaking of options, no better real life example of the influence of an outward movement in the supply curve and its impact on price and volume has ever occurred than the recent reduction in margins on stock futures and the associated reductions in stock option margins and what it did to the supply curve and price.

Frustration. I am constantly amazed at how many things the frustration aggression hypothesis explains. The idea, popularized by Dollard and Miller in my day, is that when there is stimulus that has a normal response and that response is blocked, then aggressive behavior occurs, sometimes displaced. I recently used it to explain how the kids from a family… I don’t think I’ll finish that sentence. But I wonder how often it explains why a market isn’t finished its move until it sets a true 50 day high or low. This must be tested based on nearness and distance in duration and speed. Such variables as distance and velocity and how they appeared subjectively used to appear prominently in the psych literature.

Three Sheets. I wonder how often the main thing that the Palindrome taught me, i.e. to use two new cans of tennis balls in practice, is a general principle based on physics. I find that I am much warmer and less encumbered by three sheets than by one sheet and a blanket. Presumably the air caught between the layers gives warmth by convection and diffusion. It happens so often in markets that if you only have two or three escape routes on a trade, you are much more likely to lose than if you have many. This used to be my favorite proverb in mergers, “the mouse with one hole is quickly taken.” It meant that if you were a seller, you needed many competing buyers to assure a good price. I often use this to explain to women why it’s so important that they keep their options open in their 20s, rather than hooking up with a lad who’s heading down a dead-end career or academic path, or living with a boyfriend without marriage being confirmed. Invariably I see the breakup when the girl is in her 30s and without likelihood of children for the future. I saw it come across in the Louis L’Amour adventure stories where the stowed away captain was hiding in a store room, and he was suspected of stowing away so the bad boys smoked him out with formaldehyde. They locked three escape doors, but they didn’t know he had a fourth escape drilled into a hidden passage, just for this eventuality. The market will go against you if it knows that you have one escape route like the open or close, or the first day up, but if you have five or six, then you’re too difficult to trap.

Pivots. What are the expectations after one-year pivots as a function of how close you are to the previous high? The S&P set a one-year pivot in 1999, and hasn’t broken it in seven years, especially when using adjusted prices. It’s close again. Is that the time that it really breaks through as those with low self-esteem finally say uncle? How close does it have to be before the gravitational pull of such moves becomes likely? The subject calls for a general answer and I hope the depleted Eastern European mathematico statistics departments might not have changed the cycles in any regularities that might arise from such tendencies.

Economics. The best way to get a good background as a trader is to read some of the best economics books on price theory and industrial organization. They ask questions concerning pricing strategy, market share, choice, substitutes, and incentives that crop up in practice in individual stocks every day. I like Pashigian and Landsburg and Heyne as the three best, but would appreciate insights into current books in those fields that others have found useful.

Exorcism. They say that you can never exorcize a curse until you have revisited the source. And perhaps this is related to the frustration aggression hypothesis. I am so happy when certain countries drop 15% in a day and I’m not long, that it is apparent no such exorcism has occured. Perhaps a visit to the beaches there will enable me to become a better trader.

Bunds. I notice bunds have not gone up in 15 days or so, and wonder to what extent this is non-random. Of course that’s just an academic question similar to the results that value boys use to show that buying low P/E stocks has a great advantage when they use retrospective files over the last 50 thousand company-years encompassing 10 years. I always figure they have only five independent observations in such studies and always I try to figure out if prices are so far out of line based on the simple-minded acceptance of such randomness that a trading opportunity exists.

Dr. Mark Goulston replies:

A corollary of the Frustration Aggression Hypothesis is the syndrome of Fearful Aggression. It is something that trainers of thoroughbreds and show dogs know all too well (and was comically shown in the movie “Best in Show”). One of the explanations of this is that fearful aggression results from a previous experience of trauma that violated the security of the animal and when confronted with a similar danger in the present, there is a flashback of vulnerability from the prior incident and a knee jerk reaction to defend itself from retraumatization. Humans have this also. I used to have a habit when I would appear on a television show of saying something to offend the entire audience in the first few comments I made and then spending the rest of the show winning them back. The main problem of this is that people in your present aren’t aware of the fear motivating your aggression and being blind sided or overreacted to will trigger fear in them which will start a vicious cycle of their reacting aggressively. Colin Powell would agree that this is what happened in the Iraq war.


Comments

Name

Email

Website

Speak your mind

Comments are closed.

Archives

Resources & Links

Search