13 replies to this topic

[OEXCHAOS]

The market is irrational, otherwise it would be efficient. Otherwise, how would you explaing the extremes ? But there's a method to it's madness, which is what we exploit with our TA.

NAV,

I'm an economist by education and a technician by trade. I've been doing funny and T analysis often simultaneously for about 25 years.

Let me say this about your premise and then answer your question.

Markets are remarkably efficient and they are largely quite rational. What you're calling irrationality is actually the chaos created by thousands of really smart people (and probably millions of pretty "dumb" ones with less money) trying to rationally allocate assets for maximum profit.

Those big extremes, we see are usually due to some exogenous factor that dwarves the fundamental economics of a situation. For instance, selling down a really good company not because you don't want to hold it, but because your fund had a margin call. Or because a fund fully of nervous nellies (ignorant amateurs) wanted their money back and you had to liquidate. Such things create uneconomic or "irrational" (if you will) trading decisions.

It's just those things that people like you and (especially) me (as a "sentimentologist") are looking for.

But that doesn't change the fact that by and large the market is efficient. So efficient, in fact, that an amateur fundamental analyst is rarely going to be able to TRADE the market profitably on fundamentals alone; there are smarter and better informed folks out there ahead of him competing away the economic edge.

Mark

[Jnavin]

The next short set-up will be the real deal. I wouldn't diss it.

[NAV]

The market is irrational, otherwise it would be efficient. Otherwise, how would you explaing the extremes ? But there's a method to it's madness, which is what we exploit with our TA.

NAV,

I'm an economist by education and a technician by trade. I've been doing funny and T analysis often simultaneously for about 25 years.

Let me say this about your premise and then answer your question.

Markets are remarkably efficient and they are largely quite rational. What you're calling irrationality is actually the chaos created by thousands of really smart people (and probably millions of pretty "dumb" ones with less money) trying to rationally allocate assets for maximum profit.

Those big extremes, we see are usually due to some exogenous factor that dwarves the fundamental economics of a situation. For instance, selling down a really good company not because you don't want to hold it, but because your fund had a margin call. Or because a fund fully of nervous nellies (ignorant amateurs) wanted their money back and you had to liquidate. Such things create uneconomic or "irrational" (if you will) trading decisions.

It's just those things that people like you and (especially) me (as a "sentimentologist") are looking for.

But that doesn't change the fact that by and large the market is efficient. So efficient, in fact, that an amateur fundamental analyst is rarely going to be able to TRADE the market profitably on fundamentals alone; there are smarter and better informed folks out there ahead of him competing away the economic edge.

Mark

Mark,

If markets were rational, how do you explain Nikkei going to 40,000 and coming all the way down to 6000. I can give many many more such examples (like brazil going from 8000 to 60000 in the last 4 years etc).

[OEXCHAOS]

I'll say I don't know those markets, only ours. Now, ours got out of whack in 2000, to be sure, but the only irrationality was in pockets dominated by the most aggressive and least experienced players. Both of which are common sources of uneconomic pricing. The rest of the market was merely pricing nice growth rates with decreasing inflation and interest rates. Once the interest rates rose and the growth rates faltered, and folks understood the excess capacity, then the market rationally repriced things. As I said, the market is too rational and efficient for fundamental traders to make money in. I might also say that many of the moves we see short term have nothing to do with rational pricing but rather rational gaming of the market and the system. It regresses back to relatively rational pricing, of course, but games related to programs and options definitely have an effect. As I think about markets like Brazil, I have to come away with a feeling like the market participants simply don't understand markets and proper valuations well enough yet. But that's just a guess. It might just be game playing, too. Mark