05 March 2012

Tech Juice, Money Flow and Valuations

Can we regard the market as capable of rising on its own initiative. What we mean by this is divorced from fundamentals. Well, one might say, no, not if the fundamentals are negative to this. But what if the fundamentals are not clear at all. That is, the typical state of an extended downturn, where what would be negative before the fall becomes commonplace.

This is a state the market may not necessarily value as negative, over time, changing the nature of a bull and bear market, in certain circumstances. In this market interest rates, a hugely significant variable input over time, have been effectively taken offline. As time wore on (update 4/14/15) this seems to have become hardened. So it could be said that the market will tend to compute in reduced ways over time, on something that does not change. Raising question about what may have changed in the way interest rates may alter value, when they come back online.

The assumption here is that the market will tend to compute by its own internal processes, but will not state change unless given external inputs, but that it may change the way it changes states. The regularity of pattern formation and they way this may change over time is seen as a symptom of this. However it should be noted that markets may also revert back to earlier states, to some extent.

By this I mean news shock valuations which tend to have the effect of re-setting the market into a new state. So the market can be expected to maintain its state. That is those random ranges we have seen, random not because they point to random processes, but because they are temporally ordered by external inputs.

But the ordering is a state change, once in the new state, internal processes apply. One might note that repeated shocks create a lesser effect. This may be because to find a new state requires as well a temporal ordering within the internal processes to enable it. But it may be that news effects change in the way they can effect value as well.

That is, the internal processes work to process external inputs. This may apply to the equity market as a whole, which can behave like a forex pair, or perhaps a set of forex pairs. But for individual companies, this seems to be a different matter.

We do have company news shocks, but this tends to come from the tech sector, which the market seems not to view in the same way it would view financials coming back to their rude health. However the rise above 13,000, may be that temporal ordering in internal processes of the equity market as a whole.

That is, simply the concept of tech as a blue chip, is being processed. This may not be the case, it maybe another rise contingent on that input of interest rate rises being removed in tandem with very cheap money. Time will tell, in more ways than one.

In forex we can indeed have rallys that are divorced from fundamentals, with the caveat that there is not the same kind of symmetrical causality between fundamentals and pair valuations. In that post I wrote at the beginning of the Euros run from its post crisis bottom, I questioned its validity (in this blog).

I wanted to see as well if it could make a sustained run back above 1.6, despite fundamental issues behind it. It seems it could not. But there was juice behind it, perhaps from the attractiveness of forex. It is just it ran out, absorbed by the massive absorption powers of barrier options. But it was a matter of time.

That juice now seems to be in equities. But can they do more than EUR/USD, the pair which I would characterize as being closest to a kind of stock aggregation, a collective blue chip of a kind.

To put it another way, the equity market runs on that blue chip juice, but can it run on a mixture of tech juice, money flow and its long term structures that enable growth. Well, these structures need to be started, do they have the correct environment for this.

That is can tech juice and money flow start them. The issue is party this, for a new run above the global high (in 2007) do we need a new Dow, where tech and internet tech can provide that sustained juice and are we seeing its systemic evolution now.

If this is happening, perhaps that is the argument for raising interest rates, that this long term recovery may be happening (because it gives texture to the structure that money flow needs to act on, if it is not simply to slosh about, with decay factors).

But the beginnings of such a process could well be characterized by retracements along the way. However when and if a surge comes, it may come hard.

It is interesting to note how technicals seem to be a function of fundamentals in this sense, that technicals tend to have more effect when the fundamentals are driving a market.

However they are always there, either from structure built up over time, or from new structure from programs, which may themselves contribute to temporal instability, but not necessarily in a bad way, just on ways hard to trade on, if you do not adapt to the way a computer will trade.

Of course these tend to trade in technical ways, one way or another but by this instability, may change the ways technical function in this market.

That is we assume technicals are something of an imposition on the market. The question is to what extent computers forcing technical validity and any inherent technical validity (that is pointing towards action in the market, that may be structurally persistent and hence predictable), may make this kind of trading more amenable to the human as well, to the extent that we can consider human traders in this market.

This is a question for equities as well and an interesting question in that one can ask to what extent tech companies are more congruent with this kind of structure. I believe though that temporal instability (that is a even less reliability in directionality) may be something that a human trader can make use of more than a machine. That after all, is the reality of the world, that we tend to mask, but we are aware of and we naturally adapt to.

In all event one might expect that a rise of a market like this, would be complex in its structure and not so clearly directional. But we might assume that long running structure in the Dow will allow it to rise, but perhaps in different ways. So this might override interest rates, fundamentals and so on. But it does need something, growth from somewhere.

(edited to update some ideas about change in the market, 4/14/15, 1:09 EST)

© 2012 Guy Barry - All Rights Reserved.