DJIA1. One notes a too smart by half breach of the round today in the DJIA. What fools the g_ds must think the mortals must be.

2. For yet another time, the bonds have suffered a grievous decline before 10 and 30 year auctions, threatened breaching the 4% and 5% levels, and bounced back with alacrity to levels that do not threaten the economy. How many times can history repeat? One is reminded of Crocodile Steve who always said that when he ran the show, the crocs were particularly vicious because they all remembered it was he who caught them. Thus, he never entered the arena at the same spot twice as they waited in ambush for him at the last place.

3. We frequently talk about what fields as disparate as rodeo and radio can teach us about markets, but not as often do we consider what we can learn about life from markets. One has been considering the general question of happiness. What can we learn about it from markets?

Here's a interesting gambit. It is well known that after monthly maximums the variance of the move in the S&P the following day is considerably less, indeed 1/5 as great as the variance after monthly minima, and a mere 40% as great as after normal days. The standard F tests for comparing equality of variances by looking at their ratios, which has a critical value of 1 at the 1% level of significance show that these divergences are quite impossible under randonmess. What does this tell us about human happiness, and yes, what does it tell us about markets, also taking into consideration that the maxes occur twice as frequently as the mins over the past 15 years. 

4. "The Knicks never lead, falling behind 4-0 in a sign of things to come" in losing 118-90 to Portland on March 31. What can we learn from that?

Jeff Watson writes:

Steve IrwinA corollary to point number 4. In 1969, the Chicago Cubs were in first place all season long. At the beginning of September, they had a 84-52 record and were a solid 5 games ahead of the NY Mets. By mid-season, the Cubs were already getting ready for the series, and they even wrote many songs about them.The Cubs choked and lost 17 of their final 23 games while the Mets went on a tear with a 23-7 record, overtaking the Cubs and ultimately finishing 8 games ahead. The Mets ultimately went on to win the World Series, while the Cubs quickly regained their status in the cellar. Still, Chicagoans love the Cubs, win or lose, as there's nothing like a good day at Wrigley eating hot dogs, peanuts, cracker jack, and plenty of beer to wash it down.

Nick White responds:

I immediately think of case studies of Olympians– especially Olympic Champions– as they try to adjust back to normal life, post-Games. It's not an easy transition. Post-competition depression is a real thing and the market being what it is, probably can teach us much about how to handle ourselves after a major peak or trough.

Livestrong gives a good summary of the problem:

Many athletes spend years preparing for a narrow window of opportunity–a college career, the Olympics or professional sports limited to certain ages. Intense preparation, daily practice and adjusting life to meet the sport's needs may dominate an athlete's life. After the particular event, an athlete may lose his sense of purpose and have a hard time reintegrating into a routine that does not focus solely on the sport. An athlete may experience depression if he is unprepared for the transition.

To follow the example you provided, on the day (or weeks) following their victory, Olympic champions are unlikely to go 'round the village, find their competitors from the event they just won, and then challenge them to repeat their world-best performance again…there's consolidation, reflection, relaxation. An entirely appropriate response. Without further stimulus there is rapid atrophy and de-training. There are dozens of studies of the de-training effect. With well-timed, appropriate breaks there will almost certainly be the possibility of greater physiological improvements (see any of the literature following Bompa et al on training macro, meso and micro - cycles).

This sounds remarkably like the behaviour of the market. The sports physiology literature probably has much to teach us about the extrema of markets and the conditions of extension in such situations.

Furthermore, not everyone puts themselves into an intense period of stress and competition that they have been preparing for for a prolonged period of time, yet the market does this reasonably frequently. So, being a collective representation of human emotions and biases, it's probably fair to hypothesize that the manner in which the market responds after minima or maxima is probably a fair aggregate of how we can expect humans to behave on aggregate when experiencing highs or lows in their personal lives. Hence the market can perhaps teach us something and, from that base, we can then perhaps devise strategies to more efficiently handle such periods in our personal lives.

What also of the incidence of disorder when a highly focussed instrument loses its purpose–temporarily or permanently? But, your proposed study begs a question of logic– is it possible for the market to teach its creator something directly? The market doesn't have independent existence from its participants or a character of its own any more than a violin is capable of playing music lest someone pick it up and play it. So is it better to just to review the behavioral literature directly?

Rocky Humbert writes:

The question posed is a variation on the much debated question as to whether stock markets decline faster than they rise. The past 19 months are additional fodder for those (including myself) who believe that they do.

Because the phenomenon of lower volatility at monthly maximums is much less prevalent in commodity futures markets, I posit that the phenomenon is related to the three facts: (1) that the S&P is a "net long" market; (2)fear is a stronger motivator than greed; (3)stop/loss sell stops are more prevalent than take/profit limit orders.

I'm not being facile when I observe that the reason most people own stocks is to make money. Hence after markets are rising for a time, most people sit back, relax, and enjoy the ride. However, when markets are declining, the fear instinct kicks in– and people feel the need to "protect their gains," "stop the bleeding," or the all-too-familiar, "I can't afford to lose any more money."I would additionally observe that markets which go a long time without a correction have more violent corrections. This can be quantified and is consistent with all of the observations above.

I have been an unabashed bull on these pages for the past two years, largely because I believe that the valuation and sentiment at one's entry point are the best determinant of one's long-term return. I am now growing more cautious– and just as I was buying stocks on a scale-to-oblivion in February, 2009, I am starting to sell-long on a scale-to-oblivion now. I am not shorting. Rather I simply observe that the same simple and timeless logic that predicted a 5 year double-digit return during the dark hours, now predicts a low single-digit return over a 5 year time horizon. I wish I knew where the S&P will be in a week, a month, or a year — but any claim of that ability would be pretense.

Ultimately, the markets' lesson of the past 24 months has once again been, "Be greedy when others are fearful, and be fearful when others are greedy."

Sam Marx writes:

I believe one more stock market action occurs that was omitted in paragraph four. That is in a rising market when there is pullback or slight sell off, buyers come in to buy the dips and the market starts its upward climb again.

Fear kicks in when the market continues to dip, maybe around 10% down, and then selling picks up.

Steve Ellison writes:

Many athletes go into sales after their playing days are over. In sales, like athletics, all that matters is performance, and the top salesman makes far more money than the VP of sales. Some sales managers go out of their way to hire athletes because athletes are competitive, disciplined, and focused. 

Jeff Watson adds:

There were a lot of athletically inclined people on the trading floors back in the day. It took an athletic person to handle the rough and tumble of the pits, even the smaller pits. A four hour trading session in the pit would be like a 15 hour shift in any other job. It was absolutely physically and mentally exhausting. 

Rocky Humbert writes:

 One answer might be that miners are lured into a false sense of security when their canaries are singing a cheerful melody– comfortable in the knowledge that the levels of methane, hydrogen sulphide, and carbon dioxide are within acceptable bonds — but over time, becoming increasingly oblivious to the growing risks of mining-induced seismicity and unstable mine stopes– until there is a violent catastrophe.

Likewise, the increasing happiness of market participants in a low-volatility, monotonically rising market are like the miners with their singing canaries– the violence and magnitude of the potential, but unpredictable and unknowable and unnecessary tragedy is directly related to the length of time between tragedies as the institutional memory of previous tragedies fade. The miners are alert after a recent tragedy, but after months/years of traquility, the happiness may mask carelessness.

The recent tragedy is probably still too fresh in the institutional memory to be immediately repeated — but those with excess liquidity were able to profit from the most recent tragedy, and those with excess liquidity will be able to profit from the next tragedy. These men are like spiders — patiently waiting for opportunity that only occurs once every several years.

The wisest man can see the future, he is indeed a happy man.

Victor Niederhoffer comments:

One would adduce inspired by the token liberal rocket scientist that the ratio of variances during the past 3 years has been 9 as opposed to the paltry 5 previously addresses. And his very interesting post brings back many pleasant memories of the meetings of the Royal Society adduced by O'Brian. A certain member when talking about nondescript features of this or that mollusk on the Mauritius was well known to steer the transactions and his talk into a discussion of the nesting y practices of a certain species of bird that I believe liked to test in coal declivities. What does the reduced variance following the bigs have to do with the tendency for declines to be more violent? A talk at the Society might be apt.

Stefan Jovanovich writes:

What miners have been saying is that "yes, setting off explosives will shake the ground" but it does not "cause earthquakes or increase their frequency". The miners - poor fools - have some direct experience with the amount of force it takes to move rock so they find the direct causal association between their cat-scratchings in a litter box and an earthquake a bit laughable. What defeats their sense of humor is the realization that "mining-induced seismicity" is yet another scientific theory whose postulate is close the mine. "Mining induced seismicity" in the sense that blasting = greater probability of earthquakes has not been proven; on the contrary, most of the statistical evidence suggests that this is an affinity fallacy: man-made explosions shake the earth, therefore naturally-occurring earth-shaking is caused by man-made explosions. The quality of science that accepts this fallacy seems to be on a par with the fans of CO2-induced global warming. (What a surprise!)

What has been helpful is to measure earth-movement activity as a predictor of roof-falls using fuzzy logic.

Of course, CO2 is a problem in mines, but it is not a "worry" compared to methane. If the ventilation fails, then people die from the same cause that occurs when they fall into a brewing vat or get stuck, without an oxygen supply, when cleaning out a grain storage bin or cargo hold. It the lack of oxygen kills them, not the CO2. Acidosis is unpleasant but it is not often fatal. The reason they put CO2 in fire extinguishers is that it is the one safest, most non-toxic gas that can be stored and then used under pressure to displace the oxygen supply.


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