08 October 2011

Predictions of Pricings in Forex and Stocks

Even assuming there are growth processes at work in the equity market, why is it so hard to predict the growth of equity. Firstly, it is not hard, it may be impossible. The problem is that once you begin to predict, you may make the market effectively a random process for you, therefore you are in effect gambling, because you come up against the branching factor of future events.

In fact to make a decent profit one may want a high branching factor, predictability may limit profit in a market. But this exposes you to losses. The point is one may not want to see the effects of growth, in terms of profit. But one needs to see something.

Analysis is an attempt to prune this tree of outcomes, with various levels of assumed risk, but because questions are raised about whether this is anything more than a random guess, one can question whether it does prune this tree. The non-random parts of the market may not be to do with directional share growth, even over time. To make money in recent times, one needs to know when to sell.

Crashes in recent times have taken away medium term directional valuations, but may make perfect sense from a market perspective, but may not make perfect sense from a company oriented perspective (what is the problem with US companies, very little, one might hazard).

The solution some take is to step outside of market prediction and look at the company and assume the market may do something with it. However the market keeps on intruding into this in recent times, in ways hard to ignore. So we need to consider it.

Unlike gamblers, you may be gambling on a biased outcome, biased adaptively against you, not necessarily you, but since you will probably be looking for trends, then the group of traders who can either force a trend or ride it. That is those medium term equity trends may be like volatile forex trends with deep external input, not stable internal growth trends (and certainly not stable external inputted ones, until the economy moves).

One may as well be making it harder for oneself by trying to assume that a) the past can be analyzed and b) that this analysis does not in and of itself bias the market against you.

One should assume that past data is untrustworthy in some sense, precisely because the market is generally not about continuing trends, if the trust you are looking for is that one can find directionality, which is what many want.

This is arguably true of the forex market on a day trading frame and it seems true of the equity market on investing time frames, which amount to the same thing, if the object is to make money based on the power of (forex) or lack of (equities) leverage.

Of course one can say that because the market has moved a certain way (overbought for example) it is ready to correct. Is this an assumption that past data biases the market against you (in terms of your interpretation of it)...no, but perhaps it can be.

That is, one might say that an assumption of relative untrustworthiness (relative to what you want the date to reveal) in the market's past data may point to potential pricing movements. This is simply because untrustworthiness may be more effective at pruning possible outcomes than an assumption of trustworthiness.

This is because in financial markets the data is not about trust. By this I mean at least that you are not reading a representation of a system in action, by which one can make predictive inferences therefore about its behavior. In this case one assumes that the process in the system have a persistence.

In the forex market the processes do not seem to and in medium-long term equity investing they seem in practice not to be either. They break and re-form in seemingly random fashion.

Therefore one should perhaps assume that any behavior consequent on forex or equity market process is liable not to be persistent. This means as well that it may be problematic to assume that one can make trading assumptions contrary to present trends, for example the overbought example.

This does not mean one can make assumptions to the trend, it means one must assume that the information is not about trust­. This is the same issue as assuming that one can predict pricing movements based on past chart data, and over the set of all charts. That is there is no charting data which is any more useful at predicting market movements.

All charting data may show you the patterns process produces, but the appearance and disappearance of that process is random. If it were not, the market would be predictable whether one knows what these processes are or not, unless the visibility of this effect itself is random. Now visible also means tradable visibility. That is one may see the formation of patterns, but can one trade them.

However it is possible that certain processes may be evident in their formation and if persistent, then may be tradable, if they are visible in their effect.

This is why trading on markets is partly a search for when not to trade, that is one reduces the set of patterns to tradable ones, or one tries to, but no matter how much one prunes the search tree, one does not in general have a set of outcomes one can make a weighting for.

That is one cannot oneself see the path to the solution, but it is possible one may intuitively be able to. But the market may do, but it may be it does in effect, and not by some systemic intentionality. That is, it is random in its solution path, which may be the source of the randomness of visibility. This may be especially the case in equities.

It may have a solution that has no or little relation to directional pricing changes, at the level of a pair or a security, but may be more related in terms of sets of companies, or moments of stability on longer term currency analysis.

Or it may have random movements in its search for a solution, which is a feature of simulations in computational search. This may be what you are seeing when you try to trade on day frames, or longer term investing equity frames (i.e. you need time to make a decent profit).

However it suggest that one may look for states of the market where there is non-random systemic intentionality, that is, the market is searching for an optimal solution, one may be able to see. That may be especially true in forex, but hard to trade except those freeze frame longer term views, which may be random in occurrence, and at times in equities, for example, before market turn. The problem with forex in this case, is that leverage makes those market turns hard to trade.

It may be these turns needs optimization, which is not necessarily the case during bull or bear markets. If it were, then such markets would probably not exist (or bear markets would not have mini-bull markets).

That is the market would reject such valuations, as the forex market does all the time. However that is what has happened, perhaps. Thus one might suppose that such processes do not exist presently in the equity market. However this may be precisely a test for the re-emergence of them.

That is, the process of optimization is refreshed by exactly what foreign exchange is, a very tight arbitrage diminishing process, with the arbitrage itself being diminished, to find a market rate for currencies. Is anything more sharply priced and re-priced ? Time matters in forex and subjects everything else to it.

This is not so much the case with equities, which enables growth to express itself over long time frames, rather than forex flash frames. When it exists though, if it does not reversion to forex flash happens, but without optimization of any kind, except perhaps where it filters in from forex (via market coherence).

Does this valuation wall between markets diminish when market turns happen, simply because there is little to separate these markets. That is, the test is looking for a probably non-predictable maximum position of coherence. However these are presumably non-regular occurrences in equities, thus some predictability may exist in their de-coherence from economic data.

But the issue is their re-coherence. The problem is depressions, there is not much in the way of relevant economic activity. Real economic activity, is perhaps itself random in its success.

That is, if you define economic activity as successful activity, producing cash streams. Those funding sources tend to dry up, that enhance economic activity (that is an input on cash stream to a company to produce cash streams, hopefully with a net increase, i.e. the activity is unmasked) and at least give an appearance of non-random predictable behavior.

However at some point, this is no longer the case. In this recession, funding sources for some tech did not seem to disappear. Thus this kind of enhanced activity continued, it seems.

This is why it is useful to look carefully at jobs data, which may reveal the kind of activity for the market to cohere with, which we shall define as unmasked real successful activity.

If the reader recalls, at the beginning of this mini-bull market there was encouraging signs of unmasked economic activity this blog noted, and indeed the market did seem to cohere with this, that is we are assuming something more happened than money flow. But the point is, we are looking for larger scale signs of such activity, which may come from other than the mining of a creative moat.

The question is, does such larger scale structure still exist, was its longer term dissolution masked by the asset elevation that seemed to be a cause of the crash and can we expect more than mini-bull markets (it is 14164.53, which we are seeking). That is can we expect that stable growth from the economy that makes stocks not so unpredictable, without a) restructuring the economy or b) elevating assets valuations by various means.

It does seem that b) makes forex more stable, or at least its funding conduits, like EUR/USD, but this was less the case during the recent mini-bull market. It might be expected that a) might make other pairs more directional, if done well, at least at the time of coherence, which is perhaps another related test for a turn and even of large scale structure re-emerging, surviving or adapting.

->Perhaps for an evolution of tech into what is generally seen as more stable company structure, in its own way (the adaptation, as perhaps creative moats are viable in terms of re-mining, from the minds behind them).

The question to ask is where else is sufficient growth going to come from, to do what the Dow has always done in the past, and surpass its all time high prior to an intense revaluation to near present asset valuations, at best.

At this point (the all time high) or somewhere near this point future valuations would predominate. But if this is supported by real creative moat growth, we might even get the next real rise up, with continuing unmasked success. It is always a mix in the economy, but do we need a sustainable core such as this, to rise like this.

© 2011 Guy Barry - All Rights Reserved.