The market is like a beautiful woman of the fatale variety who always amazes with her virtuosity and newness. Never the same. Both must be quantified and used to advantage.

Phil McDonnell adds:

Phil McDA couple of years ago vic initiated a discussion of Information Theory and how it might apply to markets. One particular aspect of information theory deals with how codes can be represented. For example the letter A could be 65, B is 66 and so on. To interpret the market's signal one can classify market moves into categories. An up move would be a 1 and a down move a zero. This would be a simple two letter alphabet. For a four letter alphabet of market moves we could take large moves of more than +.5%, small moves up, small moves down and large down moves of more than -.5%. For larger market alphabets we could break the moves down into more bins with finer granularity.

In doing the study I looked at various alphabets from 4 to 16 characters (bins). In each case the results showed a significant predictive ability when one computed the information content of the resulting bins. On thing I noticed at the time was that the larger magnitude bins (both up and down) carried greater information value.

Another observation was that characters which were 'missing' or in relatively low frequency tended to be more likely to appear. This latter phenomenon is very much consistent with the Chair's femme fatale metaphor. The market tends to surprise us with what we have not seen in a while. Come to think of it, it has been a long time since we saw positive drift in the market.

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





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3 Comments so far

  1. douglas roberts dimick on April 18, 2009 1:19 am

    Can This Market Be Like Eating Bugs?

    I was on a promotion tour in Shandon and Henan provinces during these past two weeks. The lawyer, who was introducing us to school and government leaders, had us stop for dinner at a country inn en route to Yantai, a famous seaside city about 6 hours drive from Beijing.

    His friend owned this little shack with heated floors. We ate an assortment of fried bugs, worms, and other such "healthy, natural" foods — so I was told the menu was healthy.

    During a survival training exercise in my basic training at Ft. Dix, we ate bugs. They are high in protein.

    For all the "supposed" health and natural goodness, though, I do not care to frequent the lawyer's friend's establishment. Nor do I favor the cuisine.

    I did wake the next morning quite excited — must have been the protein.

    Alas, could the market have now digested the bugs of recent months?

    Many appear to be a little excited.

    What of the next shoe (or bug) to drop?

    Note: http://pressherald.mainetoday.com/story.php?id=251423&ac=PHnws

    SOUTH PORTLAND — Esther Cleveland was surprised to hear Thursday that General Growth Properties, the owner of the Maine Mall, had filed for Chapter 11 bankruptcy protection.

    "I wouldn't know what to do without it," said Cleveland, who has shopped at the mall since it opened in 1971 and still visits several times a week to walk and window-shop.

    Not to worry. The mall probably isn't going anywhere.
    In fact, it's unlikely that Maine Mall shoppers and retailers, or the local retail real estate market, will be affected by Thursday's filing, industry experts said.  […] .

    General Growth spokesman David Keating said the Maine Mall is one of the company's strongest performers and there are no plans to try to sell it, although the company has a list of other properties that it would like to sell to help pay down debt.

    —End Quote

    I note that this company, only a few months ago, poo-poo'ed the idea of having to BK. I remember hedge funds singing a similar tune regarding redemptions.

    More bugs to come?


  2. jeff watson on April 18, 2009 3:40 pm

    Lately, I've been doing a lot of thinking about Rodgers and Hammerstein's "South Pacific," and Bali Ha'i in particular. Bloody Mary's song evoked the ultimate feeling of a location combined with the wiles of a Femme Fatale of a different sort. Something about that song evokes a mystical force that pulls you along an uncharted, treacherous path, all too willing to suffer the consequences.


  3. douglas roberts dimick on April 24, 2009 8:47 pm

    If Here, Then There — The Fatale?

    An article on the results of the Chinese government's 5 Trillion RMB stimulus plan…

    “So, really, when it comes down to it, the 5 trillion bought:

    1. some psychological relief
    2. some more sales of real estate, thus delaying the bankruptcies of many developers
    3. an upbeat stock market, for a while
    4. prevented the bankruptcy of numerous state firms, especially in the airline, coal, electricity, and steel sector”


    Did not the American government accomplish the same (i.e., buying time), only with a focus on financial sector related concerns?

    I both cases, here in the PRC and in the US, do we now begin to see the seduction of the market?

    To be or not to be… pulled in.

    By some of the bullish exuberance I read of late, heck, some are running in.

    I am reminded of Agamemnon’s return from Troy, with his wife Clytemnestra waiting…



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