Jan

20

 One of the imagineering tenets is to bring yourself back to your childhood to create spectacular entertainment. They like to use erector sets and play dough and sand and paints to get their ideas. I tried to go back to my childhood to get some ideas while I was driving and allow the non-logical brain to brainstorm as they recommend. I figure that kids like to rhyme and sing music and swim and do independent things and do jobs and find out about the world.

I started with rhymes. The question is whether the market rhymes. I started with the last x minutes before 10 and looked to see whether there was a one-three rhyme or a one-two rhyme. I found no evidence of a one-two rhyme but much evidence of a one-three rhyme as in "Yankee Doodle." For example, the rhymes at 10 repeat at 12 but not at 11, defined with reasonable precision, with a chance likelihood of 1/20. The subject of how rhyming and childhood play in the market deserves exploration.

Jeff Watson writes:

A common element of video games is that a series of different recurring patterns are interspersed throughout the game. The best players are the ones who practice endlessly and learn to identify and predict the patterns. It would be an interesting study to design a trading platform that mimicked a video game, and allow a group of young video game wizards to try their hand at it. With the right software, would the best video game players be the best traders?

Jim Sogi writes:

Etymology of rhyme from Wikipedia:

The word comes from the Old French rime, derived from Old Frankish language *rim, a Germanic term meaning "series, sequence" attested in Old English (Old English rim - "enumeration, series, numeral") and Old High German rim, ultimately cognate to Old Irish rím, Greek ????µ?? arithmos "number".

An essential part of rhyme is meter, as in the essential and compelling use by Shakespeare of  iambic pentameter. There is something in this structure that captures the human function and rhythm. Di dah di dah di dah, di dah, di dah.

The meter of the market might even be broken down from days, di dah, to the actual timing of the spoken and thought phrases, rather than from hour to hour.

As with jokes, ballads, most nursery rhymes come in sets of threes. It's a natural rhythm seen in natural phenomenon as well. Rhymes have application in markets and quantification.

Phil McDonnell adds:

Some years back my son was an accomplished video game player. He was rated number one on the Microsoft Zone in Warcraft. At the time they had about a million players. Our family often played as a team. I, my son, and daughter played against three other opponents. Our motto was 'The family that slays together, stays together.' That won out against 'The family that preys together, stays together.' My guess would be that became the Madoff family motto at some point.

One time my son left my PC logged on as his screen name. So I sat down to play. At the time my son was number one in the world. Immediately I was messaged by a 16 year old kid with the screen name of psycho. He lived in nearby Redmond and was rated about number three or four in the world at the time. At the time I was rated about number 10 in the world.

We played a 2 vs 2 game against some world ranked players. We kicked their butts. However the reality is that psycho won the game. I was merely a major contributor. After the game was over he asked me why I was off my game. It was clear that there was a huge difference between number one in the World and number 10. I had no choice but to fess up to psycho. The fact is that there is a huge difference between number one and number 10 in terms of performance.

To date, my daughter has been to Singapore for the local software company and is now back in Redmond at headquarters working in Treasury. My son went on to work for a Redmond based group of ex-Microsoft video game people. Then he joined the big Redmond behemoth. Subsequently he was stolen by the big G in Mountain View. His purview was as tech lead on the last software to look at your search results. Presently he is off to Zurich to improve the efficiency of the many big G programmers Euro programmers.

It is fair to say that some traders are destined to be great and others not to. It is also fair to say that many people with video game backgrounds are unrecognized for many reasons.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

From the President of the Old Speculators Club:

I suggest that searching for a rhyme is obvious and that if the market is anything, it is not obvious. A more fruitful idea may be to look for rhyme's forgotten brother: assonance.

"Assonance, (or medial rime) is the agreement in the vowel sounds of two or more words, when the consonant sounds preceding and following these vowels do not agree. Thus, strike and grind, hat and man, 'rime' with each other according to the laws of assonance." (J.W. Bright and R.D. Miller, The Elements of English Versification, Ginn and Company, 1910)

These are harder to identify and when they appear it's difficult to determine whether their existence is by happenstance or design. However, if a sufficient number occur it might be worth examining. But be careful of an overabundance of them:

"Beware of excessive assonance. Any assonance that draws attention to itself is excessive." (John Earle, A Simple Grammar of English Now in Use, Smith, Elder, & Company, 1898)

Since the vowel sound is key, and must be bracketed by non-agreeing consonants, one might look for similar volatility between simultaneously divergent averages (e.g., the S&P and the NAZ).

Russ Sears adds:

This quotation is from an interesting article entitled the "16 Habits of Highly Creative people."

While perhaps the author's ideas need some testing, the quotations alone are worth the read.

"There is no use trying," said Alice. "One can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast." - Lewis Carroll

And my favorite, considering 2008: “If you are not confused, you are not thinking clearly" — Tom Peters, quoted by Shalu Wasu

Scott Brooks comments:

Of course the market rhymes…until the poem changes. And the Mistress loves to change the poem when most are least expecting it.

During a secular bull market, the Mistress says: Up, up and away with very little volatility on any given day.

I'll make you money and you'll think it's great

you'll leverage to the hilt until it's too late

For when I change from bull to bear

you will pull out all your hair

If you confuse brains for a bull

it will be ugly when the mistress starts to cull

Culling the quants, the fundamentalist, the techs

You will feel the noose around your neck

When times are great, we all think bulls will always last

Those who do, ignore the past

During a secular bear market the Mistress says: Up today, gone tomorrow

I hope you didn't make your bull returns with money you had to borrow

The market changes from bull to bear so fast

So that if you were leveraged you lost your a$$

For a bull is very different than a bear

I know this for I've lot most of my hair

When times are bad we all think bears will always last

Those who do, ignore the past

So a trader must remember:
All the gains do not matter when you're leverage just gets fatter and fatter

So don't swing for the fences it's okay to settle for just a hit

then you'll win more than you lose and won't find yourself in deep $#!^

And finally, remember to stay out of the poo

losses hurt more than gains help you


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7 Comments so far

  1. ld on January 20, 2009 3:15 pm

    Regarding the video games, the #1 being worlds apart from #10, aren’t you just describing the tail of a normal distribution? The question is why was your son #1? What qualities, training, attitudes, reflexes, habits set him apart from #10, how about #2?

    Regarding rhymes, I’m sorry but I don’t understand the example given (”the rhymes at 10 repeat at 12 but not at 11, defined with reasonable precision”). I would expect some markets to have cycles based on the “habits” of the major players involved. As a whole or in markets of very liquid securities, I think “habits” would be canceled by equal but opposite “contra-habits” but in individual securities or certain markets there may not be enough “contra-habits” giving us the perception that rhymes apply. Do you see any other explanation?

  2. Don Chu on January 20, 2009 9:50 pm

    Beyond the natural reading of the final-stressed-syllable rhyme, there is a wider range of rhyme types which, together with rhythm and meter as raised by Jim Sogi, offers interesting prospects for reading market insights. Internal rhyme, where rhyme occurs within a single line or even as multiple rhyming patterns within and across lines and stanzas, seems to mirror the dynamic market state rather well.

    And one linguistic device which encapsulates internal rhythm and rhyme is the palindrome, especially the multiple-order palindromes of non-alphabet languages (one such palindrome, with 841 characters arranged in a 29 by 29 square, apparently contains 7958 poems – staggered/inversed/folded/turning/diagonal etc). In the context of the markets, the simpler linear palindrome may offer a reductionist analogy to a common market structure like the range.

    Looking at the DAX H9 futures for the preceding three days (1/15, 1/16, 1/19), one sees an almost perfect harmonic waveform with regular amplitudes and periods – prices moving coherently in a range, much like a palindromic function. Of course, prices lost their palindromic stationarity today, breaking down through the range boundary in a loud tattarrattat-a.

    One distinction that rhythm and rhyme confers upon poetic verse is a mnemonic-like structure which acts as a memory aid and allows for easier recall. And as commented, good assimilation and anticipation of recurring patterns, whether they occur in poetry, markets or video games, allows one that crucial edge necessary for success.

    Of course, some market days feel a lot more like Finnegans Wake or Jabberwocky than Mother Goose.

  3. George Parkanyi on January 21, 2009 12:56 am

    It is interesting how the brain absorbs information, files it, but all along is trying to make connections and otherwise some sense of it. Eventually, a result just "pops" out.

    My son Thomas learned to read playing the Nintendo GameBoy game Zelda. This game involves traveling around, collecting objects, and fighting "bosses". But it also involves meeting different characters along the way who provide clues. These clues were in script form, not audio. Now and then Thomas would come up to us and ask what this script or that script meant. One day, out of the blue suddenly he could read them himself.

    I've had similar experiences of absorbing information that on the surface doesn't seem to relate or make much sense, and the suddenly, in a moment of clarity it all falls into place.

    When I was a kid, I designed many of my own board games, and even created a baseball one where using dice, I figured out how to create the right combinations that resulted in scores and hitting averages that roughly corresponded to what was realistic in actual baseball. Once I had balanced the statistical aspects of the game (basically by trial-and-error), I created leagues and started playing whole seasons, not only tracking the scores but also the batting and pitching averages of all the individual players - manually. My parents couldn't figure out how I could "waste" so much time playing endless game after game and recording all these "useless" statistics - all based on a 6 x 6 matrix of pitch/hit outcomes. (My social life HAS improved since).

    But today I am very at ease with numbers, have an appreciation for probabilities and patterns, and I'm sure that some of that is because I played board and card games in my youth. In a similar way to how I "modeled" and balanced out a baseball game, I was able to design a simulator of stock price action that was realistic enough to enable me to look at the behaviour of re-balancing between a fixed group of individual stocks. Because I was able to modulate (fix) the maximum volatility, I was able, through many randomly seeded runs to determine an expected compounding rate for each volatility range, eventually painting a picture of compounding vs average volatility. THEN I back-tested the system with real data to compare theoretical with "real-world" results.

    I believe that portfolio management is going to change dramatically in the next 5-10 years once people realize that you can have very stable portfolios using highly volatile instruments, and actually "manufacture" superior compounding rates using that internal volatility - by re-allocating between individual securities rather than aggregated (and highly dampened for compounding purposes) asset classes. And the instruments that will allow you to do this will be long/short ETF and ETN pairs combined with traditional securities. The opposite correlation of long/short allows you to much more smoothly modulate/optimize your correlation and risk.

    I've just glimpsed the tip of the iceberg. There is a whole new field of study and potential strategies waiting to be explored here.

    At least this is what playing endless games of paper baseball has led me to. :)

    Cheers,
    George

  4. douglas roberts dimick on January 21, 2009 3:23 pm

    I am not surprised by the one-three rhyme finding.

    R&D on SMART developed a triangulation component. Although 7 points (6 plus point of origin) for directional positioning of mass, time localization required 3 points.

    Note: consider varying centers of a triangle.

    One might consider x minutes before y^2…

    dr

  5. Matt on January 21, 2009 4:32 pm

    I guess an example of a graphical counterpart to a rhyme would be the development of a trend. But, in a market that is being constantly watched, analyzed and probed, as soon the trend fulfills its definition, most observers become aware of it.
    At this point it becomes a guessing game. Most novice and moderately experienced traders, remembering the lessons from their TA books, would latch on to it. Then it becomes a fight between the “pros”. A group thinking on level 1 would fade it, recognizing that most are already aware of it. But then there is a level 2 group, who are aware of the level 1 thinkers, and fade the fade. This is similar to the thought process used by top level poker players. Thinking beyond level 2 is very difficult, and probably not very productive.
    Whenever I see a classical TA setup (trend, support/resistance, head and shoulders), I pause and try to decide from the price action, which “level” of thought is winning the battle and go in that direction.

  6. Matt Johnson on January 22, 2009 1:05 pm

    Scott hits the nail on the head.

  7. Craig Bowles on January 23, 2009 8:44 am

    The economic cycle is like driving across the country from east to west. The first part is out to the Mississippi has plenty of gas stations, so you don’t have to really worry about the gauges. The second part out to the Continental Divide, you have to keep more alert. The third part crosses deserts and you’re watching the gas gauge and temperature very closely as one slip can have big consequences. A business cycle upswing averages +34.91% the 4th mth before recovery to the 10th month, -2.21% the 10-19th month, 14.65% 19-27th mth, +4.91% 27-47th mth. Downswings vary more. Inflation downswings vary more too but the 8-13th month averages a negative return in stocks, so can be a problem beginning in March. With such increased risk and lower returns after the first 1.5 to 2 years of a recovery, buy and hold seems like a pretty risky strategy.

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