This shall be the final post of this essay. Do I hear..' at last.. '
I would like to mention before I continue with this essay that all countries have rules governing the financial transactions that bank employees can conduct. Down here the rules are very strict, and monitoring is extremely stringent. The penalities are very severe for those that break those rules.
Termination, without benefits, and legal action ensues for those breaking these regulations.
Guess most of you have seen the movie ' Wall Street '. Michael Douglas was just brilliant, as Gordon Gekko. The quotes are everlasting..
" Gordon Gekko: I don’t throw darts at a board. I bet on sure things.
Read Sun-tzu, The Art of War. Every battle is won before it is ever fought. "
Listen to any financial tv news and there is this ' analyst guru ' telling us that the market went high because there were a lot of buyers. Or that the market went down because there were a lot of sellers.
Bull****. A con for the lemmings, the sheep. That's what it is. A lie.
Think about it. How can it possibly be that there are more buyers than sellers.
For every buyer, there has to be a seller and vice versa. The number of stocks sold, in any given time period, must be equal to the number of stocks bought during that same period.
Do I make sense or not?
At any moment in time the price of an asset represents the cumulative news, events, opinions of all participants. The market is forward looking.
' The market went up, or the market went down '. Another piece of bull.
Was YODA ( since Star Wars is hot currently ) sitting behind my quote screen to lift the stock price up/down? Heavy lifting it would be too. The S&P 500 value is approximately $17 trillion!! YODA and Obi-Wan Kenobi and all the Jedi Knights couldn't move the ticker up one point!!
What moves the markets is us. The participants. When buyers accept to buy at a higher price, the stock price goes up! When sellers are prepared to sell at a lower price, the stock price goes down.
The market represents The crowd of participants in it.. Not you or me alone. But thousands, millions of us. Mostly through funds and fund managers.
And crowd behavior is more easy to detect and predict. Go see a football match, or attend a horse race...and just look at the crowds.
Crowds are primitive. We are primitive. It is in our DNA.
This is a stock chart of the company Cisco, during the dot-com era.
The cycle of a stock life. Fahim hears about it. Tells Doug. He phones Asher. The momentum builds up. Pushing the price higher. The ' crowd ' joins at the later stages..the final stages. The hogs hold on for more gains. The sheep follow their leader or just jump around. And then BOOM!
Now the fun starts. Or the sorrow. The Bears can smell blood. To the gates, they run. Every one wants out, momentum builds up. On the downside.
Hope..Some hold on. Maybe the gods shall make the stock price go up.
Thousands and millions of dollars are being lost. People see their losses mount. Their dreams about to vaporise.The can't take it anymore. They want out, at any price. Here enter our Super Crays. Neuron networks. The AI code. It triggers the programmed ' sell ' order. The price is in a downward trend. The momentum is reaching a crescendo. The crowd does what crowds usually do. They follow the others in the crowd. Now the price is in a downward spiral. It ends when nobody is prepared to purchase the $75 stock at $10-11-12
The cycle starts to repeat. In the case of Cisco..it would take a very long time to recuperate the high price. Crowd behaior. Nothing changes. The South Sea bubble. The Tulip fiasco. 1929 on Wall Street. Black Monday. I can go on and on. Crowd behavior shall never change.
$10. Down by 50% is $5. How many % to reach $10 again. Much more.
Some cannot take it and one hears of attempted suicides increasing. College provisions shall take much longer to get back to what they once were.
And this is the stock market. What about the housing bubble in the USA. Or the sub-prime mortgage crisis. Which took the entire world in a downward spiral.
Greed and fear. Fight or flee. Primitive instincts.
Here is the S&P 500...
I see music. Patterns forming, coalescing into each other. I see crowd behavior on my screen. Nothing changes. A much smaller life cycle. August 2015 was a bad month for US equities. Art and science join together. Crowds are so predictable. Mathematics...finest form of art. I have marked in blue, a reasonably simple predictive entry point. I was being conservative here.
Observe, Validate, Act. Crowds have been selling. It reaches a climax. Wait. Is it the end of the downtrend. Validate. Be conservative. Act. Enjoy the ride up.
Don't be a hog. Cash is real. It is in the bag.
I have talked about events. Stories related to events. Tried to show how closely intertwined are the markets with crowd behavior. In the patterns is music. In the patterns is mathematics.
Leave you with something to think about? When prices are going exponentially upwards..from whom do the buyers get their stocks? Who is selling them?
Similarly, when the crowd is dumping the stocks...who is buying them?
Thank you for politely waiting for this to end.
" Columbus did not seek a new route to the Indies in response to a majority directive. "
Milton Friedman