13 August 2011

Valuation, RSI Divergence and Ranging

Is a growing economy and quantitative easing equivalent, that is, can one regard QE as simulating economic growth to the extent that the market may mirror this to start growing of its own accord.

A related question is this, is it the case that the growth of the market in the run up to the crisis could be seen as having any foundation. That is, is there anything approaching growth processes persistent in the market. The question is really perhaps, if the companies of the United States grow, can the market do anything with this.

I have noted that the revaluation down of assets during the crisis may be a pre-condition for this to be the case, but holding interest rates near zero may be actually counterproductive, but QE may be productive.

Can one regard the behavior of the market during the crisis as a restructuring process. Specifically can one regard the clear RSI divergence signals as a sign of this. That is, can one regard RSI divergence as in general a source of restructuring.

This is a functional view of these signals as it suggest that they function to restructure the market, rather than simply as a sign of this process. Why might one say this, well because they have a relatively high probability of being successful. That is, one is assuming internal market processes. But was the behavior of the market during the crisis exactly external market processes.

Perhaps not, it may be exactly that the internal market processes worked, once it became impossible for funds to support asset values at their highly unrealistic levels (one description of the crisis). The market worked to drastically revalue assets downwards. But it maybe be that the market was valuing anyway at these valuations.

That is the market could be characterized as one where core valuations, the basis on which internal markets processes functioned were highly segregated from the valuations at which the market functioned.

The market does not really care in a sense about numerical valuations, indeed the core investing principle is that one wants to buy cheap companies, that is, low valued companies, which  the market will proceed to value highly, or more properly which the internal processes already value highly.

But what is the valuation, it is a valuation on a structure, that is it is to an extent a valuation on a structure of the market. It is an assumption of investing that one is finding hidden away companies, that is companies which have a structure segregated from the markets. However I suggest those companies more properly reflect the structure of the market, its core valuations.

That is there is a strong rationale for investing in such companies, they are the processes of the market itself at work, that is they have a survivability which is high. They are part of the valuation process of the market itself, which is why it is very important not to degrade that.

Those companies which move about do not have such survivability, that was borne out by the crisis. Those companies which survived best were those companies which had such a structure, more particularly one born and evolved from the valuation of the market itself.

That is companies can be segregated, but the market will bring valuations back into line, and RSI divergence is a process to do this. That is, it is a revaluing process, it is market processes valuations diverging from external processes, exactly. Its probability is whether such processes are viable.

Given this one can see why companies fall faster than they rise. A fall in valuation will be speedy given that it is consequent on RSI. But more particularly, it may reflect the necessity to destroy what has given the valuation stability in the first place.

Taking the market as a whole speedy steep revaluations may not be a bad thing and possibly highly necessary for future valuations, which is what growth and investing is about, to find evolvable growth already there and makes new growth.

But to restart growth, money must flow into assets, else one can have extended periods of asset deflation. Repeating this after those steep revaluations may make sense. Interregnums may exist, but it may be possible to shorten them.

However it may be necessary to examining the reasons why this shortening may not be be happening, even given the health of the companies of the US economy. What one might ask, is a drag on assets revaluing upwards and a way to encourage rapid ranging.

In a market where money flow rules, ranging would be characterized by steep falls and rises, because the market is correctly valuing, on money flow, this may be be a situation where RSI divergence is not prominent. Interest rates in the past have ranged the markets, but slowly. They have a large scale revaluation effect on the market as a whole.

But what is the effect of removing this from the market. Might one suggest that interest rate policies in the past have had the effect of controlling rapid ranging, a smoothing on this process and therefore a restriction of the occurrence of RSI divergence. Might it be the case that QE in conjunction with the effective use of interest rates, might be advisable.

Markets have an existence outside of themselves, they consist of the necessity to trade and sell commodities, to share ownership of equity in companies which operate irrespective, more or less, of the economy and to exchange currencies.

But the range of valuation within this is determined one way or another by the markets and it is the case that macro controls on this ranging should be examined with care.

That is, there may be conditions necessary for QE to work effectively to restart the market, rather than adding to sharp rapid ranging, which may increase with each dilution of QE.

Floods of money sent in and forced out will tend to create unstabilized valuations, but if the valuation process of the market exist unimpaired, then this may not be a problem. It just makes for an accurate market which has the same trading and investing issues as forex.

In fact it may be more accurate than before the crisis. The interesting idea is that this may make for a more accurate market when the economy takes off again, assuming persistence at least, and maybe process.

Another point is that this may be the time for a well targeted, well expensed investment project, to try and infuse growth into this process where it is sourced in many practical ways, in the wider economy. Markets may be hard to influence, but this is not as impossible a project. That is the right kind of stability which would persist.

© 2011 Guy Barry - All Rights Reserved.