Note:  Here, we've included one brief discussion on market prediction for the sake of potential subscribers.  The discussion in the "members only" section of the site covers a greater variety of bases.

******************

Sep 6, 2004...Here's a link to a very nice article at the Economist, dating way back to 2001.  The article covers a number of bases, but the focus is on rational prediction of markets, particularly market crashes.

Since the link is likely to die in the future, I'll quote liberally from the article: 

Although standard financial-market theory assumes that it is impossible to tell anything about the future direction of a market by looking at what has happened in the past—so that markets follow a “random walk”—most investors are seeking to do just that. When both real market data and random simulations of such data are put before traders, they claim to see patterns. This is no surprise. People see patterns, where there are none, all the time—in clouds, in lotteries, in mountains on the surface of Mars, and even in root vegetables. Predicting a number in a lottery based on such a spurious pattern cannot, of course, have any effect on whether that number is actually drawn. But the same is not necessarily true of the stock market. When many traders think they see the same pattern, they may respond in the same way. They may thus, collectively, create a real pattern.

And not only real, but unstable. For, paradoxically, the more orderly a market appears, the less stable it is. (Think of dominoes up-ended on a table. If they are distributed at random, knocking one over causes little damage. If they are in a line, the whole lot will come down.)

Now, we haven't done any testing, but it would seem that we have excellent gauges of market "orderliness" here on our own website.  Looking at our various short, mid, and long-term data tables, it's relatively easy to see the extent to which various trends have persisted.  One can also judge the extent to which various groups of stocks deviate from average groups.  To what extent are various groups "taking off" or "diving"?  To what extent are stocks moving in tandem?

The "feeling" I get from the current market is far from one of "orderliness".  No particular trend has been taking hold this year, except perhaps for the tendency of oils to gain (which may be a very logical response to events in the Mideast and predictions of peaking oil supply in the next 5 to 10 years).  If this feeling and the above quotes are "correct", one would assume that a market crash is certainly not imminent.

The researchers in question employed a market simulation involving computer "agents" with various tendencies.  In the real world, you've got momentum guys, bottom-fishers, fundamentalists, technicians, long term guys, day traders, conservatives, speculators, shorters,  hedgers, rationalists, the superstitious...even a smattering of seasonal investors...and more.  Some investors are more driven by fear...others by greed.  Glom them all together, with their differing and sometimes contradictory propensities, and you get the market. 

It's an interesting approach to market prediction, and we've sometimes thought in the same terms.  Problem is, the simulations would be quite complicated from a programming angle, and I'm a bit dubious about how one would arrive at "realistic" distributions of, say, fundamentalists versus technicians.  One "simplifying factor" would be my own observation that folks are normally quite religious about the investment strategies they employ...today's momentum investor will almost certainly not be tomorrow's bottom fisher.

    Copyright © 2007 Stockwarrants.com. All rights reserved.