May

12

 Recent cycle changes have been instantaneous rather than phasing in over time. The big recent drop changed the stultifying lack of vol and upward crawl which persisted over the last 15 months. Weather wise here in Hawaii we've had drought for 5 months, but since spring arrived, its been raining ever since. Another interesting and instantaneous change in cycles.

A related but different idea is the effect of cataclysmic events which have occurred historically with profound effects on dinosaurs and weather. We are seeing some recently such as Iceland, recent year's and recent weeks market crashes. A cataclysm is an obvious departure from recent norms which seem to kick off changes in cycles or make it clearly recognizable. Perhaps analysis of cataclysm or cycles norms rather than overall norms and means might be a good way to look at data. The dividing line might be tail events.

Paolo Pezzutti writes:

We are all used to changing cycles. In our lives, things go on routinely for months and years, when suddenly an event modifies things dramatically. It can be so disruptive to put into discussion values and relationships that have been quietly developing for years. Unpredictability, ironically, is what counts the most in our life. Most of us live their life striving for stability. We want a family, we want an indefinite contract job, we work to build a pension, we pay expensive health care insurance policies and so forth. Suddenly, a thunderclap, such as a death, a divorce, a new acquaintance or a new job opportunity accelerate the speed of our life. We find surprisingly ourselves making decisions with new parameters that we would have never considered only a few weeks before.

Similarily in markets, cycles changes suddenly, with no possibility to predict when they change. (Or is there any clue that this can happen?) Similarily, investors move from a low volatility environment to wild swings in a matter of days. At first, they are disoriented and react emotionally. Then they get accustomed to it and play according to the new rules of the game.

Also, robots seem to have the same approach– because they are built by humans. They slowly trade crawling up prices, printing higher opens and strong last hours for weeks, and then suddenly go wild selling all they can until the orders book is empty. I am not sure all this can be predicted. If one knew the logic with which robots (and humans) operate, one could try to anticipate… Alternatively, fast adaptation to the new environment is key. What are the parameters and signals that indicate that a cycle has changed? Is it possible to automate this process of monitoring and learning? Is it only a matter of volatility or is there something "less visible"? Visually, it was clear after a couple of weeks how the market was developing the up leg after 8 Feb. Visually, in fact, we noticed how the market changed pace during the past week. In this case, we should try and find quickly the new way of trading this environment post Eurozone sovereign debt bailout announcement. 


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