Love of Liberty : stock market

Re: Beware The Chartist

ChrisR — Sat, 04 Oct 2008 14:57:00 GMT

Burt Blumert wrote an interesting article on LRC about chartists (or market-technicians).

While I certainly understand Mr. Blumert's sentiment, I don't entirely agree with him.

I think a major error that many chartists make is that they think they "know" what will happen next. When someone says they "know" Google shares will reach $500 tomorrow, I move on without taking that person seriously.

The reality is that the future is uncertain...and any of an infinite number of variables can alter the outcome.

However, if a chartist states that there is a "high probability" of a certain outcome, I see no wrong in making such a statement. There are individuals who make a very good living reading charts and making decisons based on them. People do tend to act a certain way in certain situations. I don't see how having knowledge of that can be a detriment. However, a good chartist (in my opinion) is one who undertands that the future is uncertain and all decisions are based on probabilities.

To me, this is not much different from decisions that are made in other lines of business. For example, let's say that after a hurricane, there is a high probability that people will want bottled water. A company like Wal-Mart knows this, and stocks up on thousands of bottles before the storm. There is no guarantee that Wal-Mart will sell these bottles...any number of events can occur to change the outcome. But based on past actions of individuals, Wal-Mart is willing to speculate.

A chartist makes decisions based on how people have acted in the past. So no matter how a person comes to their conclusion, I believe it's wise to accept that anything can happen and every move is a speculation...whether it be Wal-Mart buying bottled water, or Joe Trader buying shares of Apple.

So unlike Mr. Blumert, I'm not willing to dismiss all chartists.

However, if I hear someone say that they "know" what will happen next, I agree with Mr. Blumert wholeheartedly: Beware The Chartist.

Short Sellers & Liquidity

ChrisR — Mon, 22 Sep 2008 19:15:00 GMT

Short sellers cover their positions by *buying*.

Let's say that a stock falls in price. Those who shorted at higher prices provide buying pressure (i.e., liquidity) for those who are looking to sell right now.

By removing short sellers from the picture, you are removing buying pressure when stocks fall once again. In fact, I believe this creates a situation where price drops can be much sharper since there is no short covering to act as a buffer.

Someone else must now take the risk of providing the liquidity and acting as a buyer.

Perhaps this is one of the reasons that the ban is temporary.

For a further defense of short-selling, click here.

Can a soundbite really capture market action?

ChrisR — Wed, 03 Sep 2008 11:21:00 GMT

Each day, the financial news channels tell us why the markets were up, or why they were down.

But do they really know why?

Can it be summed up so nicely in a simple soundbite?

Let's think about it for a second: Every day there are millions of different people making decisions based on their own value scales. Some are thinking about the next decade. Others are concerned about the next week or month...Then you have the daytraders who only care about the next 30 minutes....or 30 seconds!

The *reasons* are way too complex for the mind to comprehend: One person may buy because he likes the P/L statements...another because he likes the charts. The sellers are thinking the exact opposite. Some people don't even make their own decisions; instead they use automated systems, or a financial advisor. It's also important to point out that at any second, every person can change his/her mind.

Can a soundbite capture all of this?

Does the financial news factor in all time frames? Or do they only talk about today?

The soundbites often resemble the following:

Stocks were up today because oil was down.
Stocks were down because traders were on vacation.
The Fed moved the markets higher.
XYZ dropped because of disappointing earnings.

I believe it's impossible to pinpoint so precisely...especially since for every buyer there is a seller who thinks the opposite.

It is true that the financial news channels know what their viewers expect. It's only logical to supply what is demanded.

But for those who want to go below the superficial surface...I recommend turning off the tube and thinking for yourself.

We're all Speculators

ChrisR — Tue, 19 Aug 2008 16:07:00 GMT

Whenever the price of something moves in the opposite direction of what the establishment would like to see, you can count on 'speculators' taking the blame. After all, 'speculators' seem like such an easy target. The term refers to no one in particular. After all, who speaks for the 'speculators'? They're a perfect scapegoat.

I personally think the whole point is moot...because in my opinion, everyone is a speculator. The main difference that I see between a long-term investor and short-term trader is the time frame of the speculation.

Otherwise:

Both are taking a risk.
Both are dealing with an unknown future.
Both are making decisions based on limited knowledge.
Both are trying to buy low and sell high.

The long-term investor, however, is risking more of his valuable time in the hopes that he is correct. Since time is something that can never be made up, the stakes are much higher for long-term investors.

I personally take the longer-term view; but at the same time I don't look down on those who take the shorter...I believe they are valuable to the marketplace and help paint a complete picture of the market price. I also respect the fact that they are free individuals, making decisions based on their own assessments of the situation. Who am I to say that they should be 'regulated' or 'controlled' or 'curbed'?

At every price there is a buyer and a seller...both of whom are making voluntarily decisions. At the same time, both believe that they are correct in their assessments. So, to me, it's total nonsense to start pointing fingers at 'speculators' when the market price doesn't match what the establishment thinks it ought to be.

I'd like to close with a quote from Mises:

“Every action refers to an unknown future. It is in this sense always a risky speculation.” (my emphasis)

Tackling a Stock Market Myth

ChrisR — Sat, 09 Aug 2008 08:20:00 GMT

Stock Prices Up = Good

Stock Prices Down = Bad

Is this correct?

Anyone familiar with shorting knows that it's not correct. Some people make a very good living profiting off price declines. Try telling them that lower prices are bad.

However, if you watch (or read) the financial news, you're constantly reminded that rising stock prices are good....while falling stock prices are bad. I think this is very irresponsible; not only because it ignores short sellers, but because it also ignores the whole purpose of market prices.

Market prices are a critical element of the free market. Entrepreneurs make plans and decisions that are based on them. Market prices provide valuable supply and demand information. They expose the desires of consumers. These prices are most accurate when arrived at through the voluntary actions of individuals...using sound money.

Market Prices are neither good, nor bad....They are merely information.

But let's say the media is correct...and let's imagine that every single stock went to $1,000/share overnight. That would be utopia, wouldn't it?

But what would this new situation tell us about supply and demand? What would it tell us about consumer desires? What would it tell us about how and where economic resources are being allocated?

The truth is: We would be in the dark...with no idea of what to do next.

It's critical that companies who no longer provide goods and services that consumers desire see their share prices decline. If the decline is precipitous, it may be a signal that the assets and labor of these companies can be used somewhere else. After all, should we still be mass producing horse and buggies, car phones, or beepers?

No.

So it doesn't matter if it's a Bull Market or a Bear Market....All that matters is that it's a genuine Free Market.