# Market Reluctance, from Victor Niederhoffer

February 7, 2010 |

Many markets have declined about 10% from their January peak three weeks ago, including almost all the Europeans, and Asians and the US. One wonders whether the concept of reluctance in magnetism is relevant with the reluctance depending on permeability, cross-section, force, and length. What would a good way to quantify this be? One hypothesizes that the reluctance is inversely related to the speed of the descent and directly related to the number of times it crossed back and forth.

## William Weaver Jr. writes:

Crossed prior data, or consolidation post descent?

Four or five years ago I tried defining consolidation as pressure where P=force/area, so that strength of the consolidation was equal to the number of times price crossed the range divided by the length of the range. There were many inherent problems with this such as what constitutes crossing of range, or how do you determine the boundaries of the range if there are outliers. I solved both by trimming n% of the data off both sides, but I'm not a fan of fixed parameter solutions so I dropped the research.

I am a fan of buying stocks that dropped on large relative volume and have since consolidated on low relative volume. I was writing that paper last year about prospect theory and asset prices (that I never submitted anywhere) and found that the most profitable stocks to buy (using the metrics discussed) are those that are down on high volume (clarification: ranking based on change in volume divided by change in price so that one buys stocks where the change in volume is much greater than the change in price; this could be a stock that has jumped higher; volume is almost always more volatile than price, so the ratio IS dominated by volume, but produces better results than using just price or volume independently or standardizing the numerator and denominator before deriving the ratio).

I think the solution should be based on three things: time based (assets mean revert; decreasing force over time - rate of change; consolidation can only occur for so long; does it matter? one can use breakouts from ranges); consolidation based - pressure? and volume based. I'm imagining substituting volume for heat and picturing any consolidation as a tin can filled with water. However, falling volume with consolidation would then be the equivalent of depressurizing, so the can should not explode, unlike many mean reversions that we have all witnessed where price violently moves back to prior areas of trading.

## Pitt Maner III says:

[Reluctance is] slightly analogous to certain aspects of aquifer performance testing (i.e. recovery phase in ground water levels inside a well when the pump is turned off and water levels return to static level).

Typical type of software used for data analysis:  Acquifer Test Analysis Software .

Very important for water supply studies and determining impacts of production wells.

The Biscayne Aquifer by the way is considered one of the most prolific aquifers in the world and it is why South Florida has the water supply to support a large population.  After pumping down or slug testing a well in the Biscayne aquifer the water level will often rebound so quickly that it exceeds the static water level recorded before pumping began.

## Alan Millhone comments :

Bad weather has a lot to do with people's attitudes on investing.It was nice the other day and I met two customers and sold one a new roof and the other a house of windows. Weather's bad here in Belpre, OH now and another snow coming Tuesday and my phone is silent. Also, before the last snow I rented an apartment. No one will move now with bad weather in my area. Weather has to influence many things from stocks to home improvement. This affects Lowes and Home Depot.

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