Market Avalanches, from Jim Sogi

December 13, 2013 |

 Avalanche prediction requires the study of the snowpack both historically and how the snow structure has metamorphosed over time. One of the prime causes of avalanches are weak layers and slab formation. Weak layers in the snow pack are layers in the snow that cause the snow on top of it to slide off it and down the hill causing an avalanche. Weak layers can be low density snow or an ice layer or hoar frost flakes. Slab avalanches are created when higher density snow bonds together then slides on a weak on steep hill. Avalanches can kill.

Avalanches remind me of markets. You can study market structure historically by looking at the number of trades at a price. Over time the density may change. Market order depth structure is not available in full but could be inferred to some degree. Some parties have access to full book.

The theory is there are weak layers in the market structure that might cause a market avalanche or rapid rise. There may also be dense layers in the market structure. An example is a long bar with big price change but low number if trades. Time may change the number of trades at the prices or depth of orders might affect the reactivity of the bar. And a gap is also an example of a weak layer.

Duncan Coker adds: 

Jim's post on avalanches' relationship to the market can be summed up in one word. Respect. Respect that at any point in time the market is in equilibrium. It is priced correctly given forward required return, the price of risk. If one disagrees and expresses this in a position, the null hypothesis is the market is right and I will be wrong. The mountains always prevail in the same way, and if I am venturing out in the back country, I will show due respect.


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