15 March 2011

Forex and Stock Valuations

I have noted that the Dow may be a series of coarse grained computations, but the forex market may a series of fine grained computations consequent partly on the equity market. Why might this be the case.

The computations of the Dow seem to be long term directional processes evolved and consequent on hard fundamentals, that is both economic and computational fundamentals (in a sound economy these should be similar).

However the enormous forex market does not seem to work this way but these markets do seem to have a relationship of flash causality, the question is how is this changing. To perform flash causality, there needs to be a fine grained process, but more importantly to compute value there needs to be fine grained processes.

But for there to be a value there needs to be coarse grained highly inputted processes. Without this you get money flow valuations, back and forth like waves, boosted now and again by differentials and floods of cheap money.

The crisis was useful to reveal the functionality of the market, the aftermath can be as well. The question right now is how much does company growth support the Dow versus the effect of QE2.

This is a question about growth versus money flow, from the forex market directly into equities. Why, well because the aftermath has made the equity market like the forex market, as Hardanalytics.com has often remarked.

So what has happened to those long term computations. This is the question referred to often in Hardanalytics.com. Is keeping interest rates so low like this for a most exactly extended time, damaging the functionality of the market. If it hurts this process yes.

But is this process being kept alive in forex. That is the question. I am suggesting it is. I am suggesting the forex market is stabilizing the effect of interest rates, it is the great absorber of risk. Risk I suggested is the invisibility of processes.

So are interest rates increasing or reducing risk in the forex market. It might be expected increasing as this absorption may increase the lack of visibility of the markets. Is risk intuition neutral ?

By usual definitions of market risk, it is not taken into account, but on this concept of process invisibility it most certainly is. Intuition in trading seems to be a way of tracking market processes in tradable ways. Intuition is a highly important part of forex trading, as it is not amenable to rule based analysis.

If you rely on rules, you have to gamble. In fact by trading this way you are trading with maximum risk, except for the fact that structures reappear with some regularity, that is you get lucky based on rules derived from domain knowledge.

That seems to be part of the reason why so many lose money, such structures are deeply unreliable in forex (but they may be more reliable in equities). Great forex traders may trade this way, but I might suggest they use something more which is that intuitive feel for the market Hardanalytics has discussed in the past.

It may be they simply have a large and flexible rule set, but the application of such a method suggests intuitive actions, because that kind of high speed real time association of rules is something no computer can do.

That is they reduce the risk of an inherently risky method. I have suggested that forex may be more amenable to structure tracking, or more properly a feel for function in the market, thus in theory it could be less risky than equity day trading.

I am suggesting that trades exist in the moments when money flow and growth processes interact, to produce trends. But I am suggesting as well that these are less stable. But I am suggesting as well that they are more well founded as they reflect the raw computational stream from the growing US economy.

Trends before the crisis tended to elongate, but they also had a tendency to sharply end, but not reverse, trapping one in at the top, for example. Why, well perhaps because they were no growth processes, they were money flow being presented as growth processes by using interest rate differentials, resulting in a huge collapse.

Suggesting this collapse was showing in the forex market. Again, absorbing risk. But a risk created by doing this, by hiding or more properly simulating processes. But future process streams - the micro optimizations contingent on processes over long periods of time in the equity market, which may be decaying.

However micro growth processes in forex decay all the time, maybe the decay of long term growth processes in the Dow is a good thing, generating new processes contingent on closer symmetries between forex and equities, forged in the crisis.

This is an idea of the forex as a cauldron of processes for evolving processes for the equity market, an optimization over structure. It is as well an idea of how to get that new Elliott Wave going again. It is as well an argument against trying to control the forex market, even if it were possible.

One could ask whether the decay process is itself important. This is a feature of natural systems, but one must be wary of using such analogical reasoning, as the Dow is a product of minds in action and long term systemic evolution (assuming such systems evolve at a much faster rate than natural systems). What is this decay process in the markets. It is release of structure for renewed computation.

That is there is a finite amount of data to compute on in the markets, a lot of it is noise. It has been noted that there is noise with information content in the Dow, noise contingent on fractional Brownian motion. But I am interested in data which is not noise.

That is, computable data and the act of computation itself, which may be the same thing. That may be what the markets are, or at least the processes existing within the market. Investors and traders are looking for this, but investors most specifically. Traders are looking more for processes.

But this suggests directionality in market processes comes from such release of structure, which is the essential premise of the analytics on this site. Again, this idea of investors transposing functionality into the forex market, but a transposition enabled by the market.

It suggests that investors are looking for a key, which is what was suggested is happening in terms of a financial statements with the set of applicable financial statements. This seems to be expressed in terms of changes in money flow.

But it suggests that investors activate this to an extent as well. But not perhaps as an imposition, but rather as a way of activating processes to grow equity. Without them, the decay processes would have no information content, and no tradable direction.

So what is a financial statement capturing in terms of market processes. It is the endless desire of those behind them to key in with growth processes. It may be the market and economy behind it takes care of this given coherent creative output. But again is this idea of active creation of such a key.

It maybe the statement captures another view of this process. Thus one is reading the market with a statement and one inherently reduces risk when doing so in a way in accordance with financial analysis.

There is no question such methods can find you companies which will grow their equity over time and take advantage of compounding. The question is though what does one do with a market which is not being structured to the extent it can be externally, to do this.

That is interest rates raised, and investors looking for companies whose equities can grow over time. The point here is not the sums involved or the number of trades, it is the time and the presumed fact that this has contributed to the creation of the black box processes in the Dow which work presumably to expand equity.

I am suggesting that money flow is not that important to structure, and hence to the assumed formation of programs of some kind. Thus the size of the forex market is may not be that significant.

Arguably, when the volume in forex dramatically contracted after the crisis, it was a much more significant instrument of economic process. This suggests as well that the money flow trading in the Dow, has a neutral significance to the Dow. 

It is about functionality, and as the Dow become a cascading waterfall of money flow during the crisis, the forex market became functionally very important to compute value.

But it always has been and arguably the valuation issues of the Dow increase this - growing equity to the potential in a financial statement is a very strong example of valuation at work. But it is hard to see how value can be restored without a working equity market.

© 2011 Guy Barry - All Rights Reserved.