Aug

24

As an island resident we have to worry about hurricanes this time of year. Lots of interesting things about hurricanes but one of the biggest is they are pretty unpredictable looking out a few days/weeks. A look at any "spaghetti" chart will show that the current storm, Isaac, might end up in New Orleans or it might end up in Boston. A pretty wide range. Generally it is best to have some supplies on hand when living in danger zones but to avoid closing the shutters and making amends with the almighty until the storm is right on top of you.

That said, all models seem to predict fairly well in the short term. Has anyone looked into spaghetti models in predicting market movements? Thus far my simple google searches haven't turned up much in the way of the math behind the models. I know some weather predictions involve the Lorenz indicator and elements of chaos theory so perhaps that is a good starting point.

Gibbons Burke comments: 

Interesting fact: Isaac in Hebrew means "he laughs" or "he will laugh". Sarah, his mother, laughed when she overheard the prophesy of the three visitors telling Abraham she would bear a child within the year, past the age of childbearing.

Russ Sears writes: 

I believe you are looking for Lorenz Equations.

While not my expertise, I think this is best visualized as two circular motions pushing against each other, the pressures, speeds and dynamics of eventual interaction makes the path "chosen" impossible to predict exactly. Often they will "spin" in one direction or the other because a very small tipping point gets rolling and will be opportunistically reinforced.

Others like to illustrate it with the "Lorenzo Water Wheel".

Here is a video illustrating it.

Perhaps the water wheel is a better analogy to the markets, The bulls are pouring money in, the bears are leaking it out and the financial/economy weighs the inertia and gravity to the spin.
 


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