Sluggish Market & Ant Theory

ducati998

Experienced member
Messages
1,196
Likes
68
Efficient market theory would, if accurate, see all news reflected in the price within a very short, or almost immediate timeframe.

If news cannot be predicted, then, by definition, price cannot be predicted.
Thus, traders, and investors, who subscribe to the theory would not waste time in analysis of any description.

But, if relatively few are now engaged in analysis, then the market will not respond as quickly to new developments. Thus, analysis can provide an edge.

As an example, a rule from logic.
Sentences of the form "H implies I" are equivelent to "not I implies H".

Heavy rain implies that the ground will be wet.
Conversely,
"Dry ground implies the absence of heavy rain"

Using this rule of logic, we can restate;
"Overwhelming belief in EMH implies it's falsity.

Sluggish market theory, the belief that markets respond slowly to new developments, and that analysis is profitable, will eventually lead to efficient markets, as the number of analytical methodologies increase to take advantage of the anomalies, ultimately removing price inefficiency, with a return to EMH.

This would indeed seem to be the case, where, markets fluctuate between emotional and rational extremes, with periods of consolidation, or directionless price movement within a defined range.

Ants.

Are people rational, or emotional, or a combination?
And how does this effect stock buying, selling decisions?

An experiment was conducted utilising ants, and 2 piles of ant food. The food was replenished on a daily basis. Where would the ants go after their first visit?

Entymologists predicted a return to their first pile of food.
This didn't happen. The ants fluctuated wildly between the two.
It would seem they were ( a ) influenced by other ants, ( b ) just randomly changed their minds

What has this to do with the market?
(a ) buy, .........( b ) sell........................
Why would you pick one over the other, on a daily or weekly, or hourly basis?
Why would you change?
What factors would have to change and influence you to totally reverse your previous analysis?

cheers d998
 
The hypothesis put forward, that news drives the market may be incorrect. The market may drive the news (at a macro level that is) i.e. the equity market may be a leading indicator of confidence and the good or bad news flows from high or low confidence.

It seems that market efficiencies tend to move in trends. Any hedge fund strategy is likely to be up against high market efficiencies until the money gets bored and goes off else where to play.
 
Now the latest offering is Ants, is it ducatti ?
icon13.gif


What next ?
 
ducati998 said:
Efficient market theory would, if accurate, see all news reflected in the price within a very short, or almost immediate timeframe.

If news cannot be predicted, then, by definition, price cannot be predicted.
Thus, traders, and investors, who subscribe to the theory would not waste time in analysis of any description.

But, if relatively few are now engaged in analysis, then the market will not respond as quickly to new developments. Thus, analysis can provide an edge.

As an example, a rule from logic.
Sentences of the form "H implies I" are equivelent to "not I implies H".

......

cheers d998

before i begin i would like to say that i mean no aggression with anyones view. what i say here is simply my observation and not meant to be a personal attack on anyone.

1/ news can be predicted. interest rate decisions for example. the fed currently has a no surprises policy for eg. they will indicate if rates will rise or fall before the next fomc. so this is wrong.

2/ But, if relatively few are now engaged in analysisagain we have someone here who assumes the market consists of a bunch of retail traders. it doesnt. retail are just a pimple on the markets butt - mostly waiting for the inevitable. big money spends BIG money on analysis. as you are a fundamental 'follower' i really am surprised at this observation. have you ever heard of day traders buying a reuters or bloomberg terminal for the news feed?

3/ who said price follows news? perhaps, sometimes, news follows the price! look and you shall find!!
 
Tuffty

The hypothesis put forward, that news drives the market may be incorrect. The market may drive the news (at a macro level that is) i.e. the equity market may be a leading indicator of confidence and the good or bad news flows from high or low confidence.

Sure it may well be, however that does not seem to stop endless commentary on news events accounting for market moves........................just read through a couple of days worth on the DOW thread.

As regards "confidence" and the market being a leading "indicator" or discounter of impending news flows, it would seem historically to be the opposite, viz. when the market is high, confidence is high, when low, confidence is low.

CC

news can be predicted. interest rate decisions for example. the fed currently has a no surprises policy for eg. they will indicate if rates will rise or fall before the next fomc. so this is wrong.

Absolute twaddle.
By definition then the interest rate decisions are not "news".
You predict thursdays headlines if the news is predictable. You have taken one news variable, out of millions possible, and extrapolated it exponentially.

But, if relatively few are now engaged in analysisagain we have someone here who assumes the market consists of a bunch of retail traders. it doesnt. retail are just a pimple on the markets butt - mostly waiting for the inevitable. big money spends BIG money on analysis. as you are a fundamental 'follower' i really am surprised at this observation. have you ever heard of day traders buying a reuters or bloomberg terminal for the news feed?

Where exactly is that assumption made?
The point being raised..........as you have totally missed it.......................is this.

There are a number of broad philosophical divisions within analysis.
Technical Analysis
Fundamental Analysis
Quantitative, Fractals etc.

Those that partake in any form of analysis must believe by the rule of logic, that markets are inefficient, and that there is a profitable niche for exploitation by the performance of analysis.

The greater the number of people partaking of analysis, the less available will become the inefficiencies, thus the market moves towards efficiency and EMT.

This does make the assumption that the analysis employed is valid at discovering tradeable and profitable inefficiencies within the market.

Which goes back to the ants.
Why did the ants fluctuate in their decision tree?
2 reasons were put forward..............1...they were influenced by other ants........2...unknown, random decision.

Therefore, if the analysis changes minute by minute, how efficient is the analysis? How efficient is the market?
The longer the timeframe the analysis is believed to be valid for, the more inefficient the market, and the more efficient the analysis.

who said price follows news? perhaps, sometimes, news follows the price! look and you shall find!!

Efficient Market Theory makes that statement. But if you have a valid example feel free to post the example.

cheers d998
 
jafa

The point is this.
Is the market efficient, inefficient, or fluctuating between the two states.

If it is efficient, your analysis is at the mercy of news driven events.
If inefficient, then analysis should in theory provide you with an "edge" until the inefficiencies are closed
If efficient, then possibly sitting tight is the "best fit" answer, until inefficiencies return.

Assuming for the moment that you agree in part..............how then would you recognise an Efficient market, or an inefficient market.

This returns again to analysis. Your analysis must be able to distinguish between the two types of market, and when identifying the inefficient variety, locate the focal point of inefficiency to allow a profitable trade.

cheers d998
 
jafa said:
I'm struggling to see the point.

What are you getting at Duc?

lol - i dont think even he knows!!

something about efficient markets i think but i am not sure, as this theory isnt worth the paper its printed on. if these theories were true then academics would be rich from the markets. guess what....

no worries ducatti. your ignorance is our benefit.
 
If markets were efficient would there be fluctuations of price in the absense of news? Would we see the broad correlations in the stock market if individual markets were efficient?

Or is sentiment the driver of price?

BTW I wouldn't recognise an efficient market if it fell out of a packet of cornflakes.

Cheers
 
charliechan said:
lol - i dont think even he knows!!

something about efficient markets i think but i am not sure, as this theory isnt worth the paper its printed on. if these theories were true then academics would be rich from the markets. guess what....

no worries ducatti. your ignorance is our benefit.
Seconded.

Do not educate, not wise. Best left ignorant.
We need cannon fodder.The more, the better.
 
jafa

If markets were efficient would there be fluctuations of price in the absense of news? Would we see the broad correlations in the stock market if individual markets were efficient?

There is never an absence of news.
Even in a sleepy stock like NEN, where there is little stock specific news, there are always broad economic, or political happenings that can be bolted on to explain any fluctuation in price.

Are you saying correlation between individual stockmarkets, NASDAQ & FTSE, or correlations between NASDAQ, S&P500, DJI etc.

Or, correlations within the market between industry sectors?

Or is sentiment the driver of price?

You're looking for the answer without even defining the question. I personally believe "sentiment" is a huge component..................the ants just changed their minds.

BTW I wouldn't recognise an efficient market if it fell out of a packet of cornflakes.

But assuming for a moment that you could.............do you think it would be of any practiable use?

cheers d998
 
My opinion is that markets are not efficient, or even logical.

A read of the yahoo message boards (you know the ones for each individual stock) confirms this for me.
 
ducati998 said:
......

But assuming for a moment that you could.............do you think it would be of any practiable use?

cheers d998

no i dont.

great news folks. we have an efficient market. now what?
:eek:

i know! lets write a book and try and look clever!
 
jafa

My opinion is that markets are not efficient, or even logical.

And I would concur. Therefore we have a situation of a sluggish market.
Where we have a sluggish market, "news" by definition will not alter our analysis.

Analysis, has relevance in a sluggish market by the rules of logic.
Therefore, our analytical tool serves two functions;

1.....To identify that the market is in point of fact "inefficient" and,
2.....To identify the locus of said inefficiency.

If, as we believe, the market is inefficient, and our tool robust, then our analysis should have a timeframe or price range that closes the gap between inefficiency and efficiency. ( our profit ) that is unaffected by "news" as this would by definition define an efficient market.

cheers d998
 
Rude

Ducatti, price is efficient. People are inefficient.

Well certainly I would agree that people are inefficient, and that would then by definition prove price also to be inefficient.

Therefore if price is inefficient, and we have an inefficient or sluggish market, then analysis is a profitable undertaking, if it meets the following criteria;

1....Identifies that the market is currently inefficient,
2....Identifies the locus of that inefficiency,
3....Identifies the point of returning efficiency in the market,( the return of randomness )
4....Ignores news, ( part of the rule of logic defining an inefficient market )
5....Requires no stoploss ( as a return to efficiency, and randomness only requires a stop )

As soon as a system, or methodology, requires a stoploss, this is tantamount to admission that the market is random, news dependant ( ie. discounting the news via price )

FetteredChino's system currently running in the thread "Live & Die" is an example of a "Quant" methodology, ie. "Reversion to the mean"

It has no requirement for a stoploss, as it is not an "Efficient" methodology.
It is by definition an "Inefficient" system as it is not random, and it is not news dependant.

There are of course other systems that are "Inefficient"
cheers d998
 
Surely the definition of an inefficient market is one that allows some participants to make 'super normal profits' ( economists term ).

There are also degrees of inefficiency. You can't describe a market as efficient or inefficient as there will be a grey area or pockets of inefficiency. The arrival of ebay has made the second hand goods market much more efficient than it was before but there seems to be many 'professional dealers' still.

Ducati, Your note re stop loss above makes no provision for a market that fluctuates between various degrees of efficiency.
 
If the ants continue going to the two food piles in roughly proportional numbers. Irrespective of whether each individual ant returns to the same food pile, does this indicate an efficient market?
 
Top