29 August 2010

Valuations of Forex and Stocks

The question can be asked, what is a fair valuation of the Dow. Well, look at the valuation found in the depths of the crisis: Dow Jones MSN Chart. Set it to candlesticks charts and look at 10 year.

In markets spike valuations are probes, but the valuations seem to have more validity than what they sound, a spike. They seem to have a computational reference which may continue over time and this property may be strongest in forex. It does seem like the equity market was most like a forex market during the crisis as this blog has noted.

My feeling about the forex market is it references true economic value of countries, which is one reason governments can fear it, not to to mention everybody else, nobody can control this market.

Currencies can be pushed up and down, just like stocks, but at extremes the computational structure of the market itself seems to be at work and this seems to have a hard reference. The fractal nature of this market means those extremes are everywhere.

That is one reason why markets cannot be controlled. At a certain stage a valuation is reached which may be hard for the trader to predict (mostly impossible), but which makes sense in the market over time. That really is the fundamental problem with forex, currency prices changes direction at times which at some stage nobody can predict, but are obvious afterwards.

That suggests precision and structure but as well a functionality which is hidden from the methods used to analyze the forex market. One gets lucky, thus it is not really a matter of prediction. In investing in a working market one can buy a company with good financial structure which is cheap and expect it to grow, assuming the market does not react to assets inflation as it did in 2008.

However there are pricing pressures in forex which are outside of this computational structure and that is order flow, it is the basis for the trade on 8/26 I mentioned where a trend upwards for USD/JPY was temporarily reversed by a figure which will tend to have orders which reverse the order flow (.e. .50). This trend re-started when it hit a figure which tends to allow for this in terms of order flow.

However it is unlikely the Fed will let that valuation probe in the Dow be found again, the question one must ask thought can the Fed and other central banks stop this. And even if they do, can they stop the market from undoing this at a later stage.

Let us hope the recovery is what it can be, then the dependence on money flow lessens. The market tends to reject forced valuations, like what happens when traders try to push a currency up or assets are inflated by housing bubbles.

The point is have economic conditions changed since the crisis to make higher true valuations of the Dow valid. A real recovery happening is a positive change (and this blog believes in this), but cheap money being pushed into assets was not a recovery.

The government needs to encourage the creative heart of the US economy this blog has noted. Such technologies may find resistance from established companies, but they are the future.

© 2010 Guy Barry - All Rights Reserved.