27 August 2011

Forex, Stock and Commodity Value Stabilization

Can one expect process to produce regularities that are tradable. That is, are they insulated to a sufficient extent that they are not subject to erosion.

Since I suggest they are the cause of these regularities, the answer would seem to be yes. One might ask is the market at times more or less coherent with its own processes. Is this systemically a valid question.

Yes, because those who input into the market, are not only not aware of the processes of the market, they mostly try and impose their own view of what the market might be doing.

One might ask though are those processes such that they are not suited to trading, that is they will not produce any regularity that one might follow or adapt, such that one can create a differential in your favor over time.

That is are there processes attuned to the needs of a trader. Firstly what is the market exactly attuned to. The forex market is attuned towards the effect of vast sums of money on valuation.

A package or aggregations of this is inputted into the market either intentionally or for other reasons, and traders try and ride the effect on the market. That is, they try and guess what the effect of this will be on the relative valuation of a currency pair.

Analysis is either based on the inputs, fundamental, or the outputs, technical. However given the severe issues in predictability, what the market does with these inputs and its processing of these outputs would seem to be of most importance.

The stabilizing effect of the forex market rapidly counteracts this effect. If it coincides with a growth process, then a stabilized growth may occur, which erodes to finally fade with retracements.

It may as well coincide with a large candle driven fall, though, that is in effect these buy orders, trigger a massive retracement.

--->Or it may do what the market functionally does, stabilize this valuation into a range.

So the question is, can the market function to stabilize, thus as a trader one can ask is the market such that this cannot be enabled and thus traded.

One does not necessarily need to ask this of the equity market. Even as a day trader one is looking for the function of the equity market to change valuations. What this suggests is that the placing of large orders may function better in the equity market to change valuations on a day trading scale.

That is, this effect known as money flow is more in coherence with equity market function than forex market function. But one has to assume at the short time frame the money flow input is in coherence with the longer term valuation path of the security.

In fact one might hazard that this lack of coherence makes forex in effect relatively more tradable, except in times of equity short and long term coherence.

What about commodities. Oil seems like it can enable stable growth processes, as long as there is coherence with its valuation in the economy. That is, it is limited by its price at the pumps and certain other factors.

This does not apply to metals in the same way, but it can be questioned how internally stable those valuation increases are. I find that the pricing behavior of metals is not strictly like those of currency pairs, despite dollar mirroring, and has certain features of commodity valuations.

This applies to forex as well, at price extremes, of course, where market valuations start to count in the real world, and does not strictly apply to equities.

However, because there is a point where the valuation of a security takes off on valuations based on future expectations, there is a point where this ceases to be the case. Now those valuations seems difference from those based on future valuations, especially on the return to this state. Thus in this sense it does apply.

So is this stabilization. Might this suggest the importance of this process even in equities, and the equity market considered as a whole. It gives as well a view of the behavior of the market as a whole since the end of the century. Arguably equity valuations return to optimal expressions of their underlying value, but not over time.

However, this said, equities do seek higher valuations. This does happen in other instruments, but it tends to be driven on speculative fever rather than in a belief of the underlying future worth of it.

As noted, EUR/USD up till the crisis did behave just like this, and here it could be argued that future belief in the economic paradise of the Euro, with a US soaking up demand for its services and goods drove valuations higher.

The behavior of the pair since, with the inability, despite all the expectations for it, to breach through 1.5 in such a way as it could technically continue back above 1.6, suggests something like the collapse back to present valuations, where it has ranged so far.

For USD to go higher, especially referenced to EUR, arguably needs a removal of expectations for EU growth contingent on US demand. In term of JPY, it needs a sense of optimal values for USD to be higher.

Companies in the US grow, but the market needs to have a sense that it can value of future valuations, that is what matters. When markets rush to great heights, it is like a suspension of belief, which brings good times for so many.

But it is real. Avoiding massive retracements is a another matter, but there is a persistence of wealth and the capacity to re-generate wealth through retracements, to put it mildly, in fact one can argue that this is precisely where the wealth is generated, that gets valued by markets.

To lessen retracments is to make use of the interregnum, to make the assets valuations underlying the rush upwards, sounder. An unvalued asset (in terms of USD in markets) that can generate great wealth over time is what investors seek and this is what the US itself looks like to this blog, in some sense.

Investors want the unstable valuations as these go high, but they bring as well great risks of retracements. What do stable valuations do for you, as in investor, well they bring the slightly increased probability of higher valuations in the investing future, as long as they are stable and not dead, either to the market or to the capacity of the assets themselves to grow.

The higher probability investment still lie in those companies which have not yet been taken high, but have the capacity to do so, which is why investors seek them. Why, because with these companies one can presuppose the function of the market to grow their equity. The market itself may reset itself to this state with retracements, thus enabling a kind of growth anew, for itself and countries.

But to do so now, needs a belief in a future growth in the market, as a system to value. The belief of this blog is that this functionality remains, but it may need changes in interest rates.

In all event for economic growth now, is there an alternative to the US, Germany and China. That concept of engines still presumably applies. But the idea is to make it such that the US can continue to grow and innovate and improve its asset base through the next market highs, and thus reduce the lows, if this is possible.

The concept of asset bubbles to sustain market highs came undone in 2008, and it is perhaps best not to restart this again, but it seems so far it is not possible to do this. Valuation on future expectation is not strictly speaking an asset bubble.

© 2011 Guy Barry - All Rights Reserved.