How Markets Change « Thread Started on Aug 31, 2007, 5:13pm »
I want to explore observations people have made pertaining to how market behavior has changed over the years. The study of this phenomena is one of the most secret kept and secretly desired pieces of information by investors and institutions today, and it is for good reason. For example most strategies will work if tested against the right period in time, however when will the strategy not work, and better yet how will we know if it will work from today forward or not? Below are examples of things that have changed in the market and their effects. I would really like it if other people shared their observations if they have them, or their opinions to why someones observation might happen.
My first observation is going to be a 14 month period prior to the Russian bond default of 1997 in which most algorithmic trading strategies don't work. Nobody knows exactly why they don't work during this period of time, however research that I completed recently regarding trending market volatility suggests that upside-volatility created a situation that defied prior possibilities. During this time short-term volatility (or vol as I will call it from here forward) was much higher than long-term vol as the market trended higher. Theoretically this is near impossible for fundamental and psychological reasons. The reason is that investors do not like volatility and thus sell securities that are volatile and replace them with securities that are not volatile. Also, when a crisis occurs people sell securities as if there is no tomorrow, creating high vol, yet when a market is trending higher vol is lower as investors provide a long term stream of buying (most investors don't put all of their money on the table at once). So in the case of this period with short-term vol higher than long-term vol (meaning vol is going up) it must have meant that stocks were being piled into faster than they normally would have been. A fundamental reason for this could have been inflation.
Continuing with vol... In the early 1900's vol was much greater than it currently is today, yet investors still whine about their equity curve. It was once a favorite and quite practical trading strategy to watch a basket of stocks trading under $100 and wait for one of them to cross. When a stock crossed $100 it was a sign that within days it would be at $200, so at $110 the move would be confirmed and traders would pile in. This is no longer a very good idea, so don't trade it... The reason this was possible was that there was such little volume as compared with today that if as a trader you bought a stock at $115 and $116 there might not be any offers below $121 because you wiped them out! Thus stocks typically moved tremendous amounts each day. (Read Reminiscences of a Stock Operator for some good stories about this, then ask me what happened to Livermore in the end). I bring up this example of high vol because it's easy to understand why it occurred, but now think about this: At one point the NYSE decided to not trade on Wednesdays because volume had increased so much that people needed the day to catch up on paperwork! (Remember this is before computers). When this occurred vol dropped substantially. Why? Many believe it is because with more time to think and less time to panic investors were able to make better decisions. A piece of evidence that backs this up is that high volume days are always down days, or panic days. When investors have to make decisions on the spot they are confronted with questions they don't want to answer, like "What will happen if I wait to sell on the close? Will it be up or down?" (this is why planning out your investments in ALL scenarios is always a good idea, and knowing your time frame is possibly the most important part of any investing strategy; RULE: never say "oh, it can't go there." because now it will). Since we have now determined that investors make bad decisions when pressured to act it makes sense that market vol went down when there were less days to trade during the week, or even if they are just spaced out. When looking at today's markets one might also want to look at the effects of electronic trading, and how we are at a point where one can trade close to 24 hours a day! Good or bad? Don't forget that the more trading days in a year the higher your return can be. Greed?
Now lets look at vol as of late. Vol is up substantially due in part to the recent sell off, but because we already know that high vol leads to lower stock prices, was the sell off that followed two months of high vol a surprise? Good answer! Now for some exchange talk: I believe it was July 3rd of 2007 that the 'Uptick Rule' was abolished. The history of the uptick rule is simple. After the crash in '29 the SEC was formed and they needed a way to protect long only investors against short selling sharks, who would use high volume to collapse one sector and profit from the collapse of each of the following sectors (this is called painting the tape, and no matter what the regulations, it always happens and it never works twice, so DON'T do it unless you plan on losing everything and going to jail when you're caught). The uptick rule said that if a stock last traded at $20 and the next trade was $19, it had to trade at least one 'tick' higher before it could be shorted, meaning it would have to trade at $19.01 (in different securities a tick can be a different amount, such as in options where some trade by a nickel and some a penny). Because of this rule if a person wants to manipulate a stock he cannot continuously short it and make the price go down, he would have to buy it and make it go up. Since Ira's are long only accounts this means that stock manipulation only helps investors (until it is inflated too much, at which point it drops back down to it's prior levels). Recently people have said that specific days in years like 1987 prove it didn't work but that's not really the case. In 1987 when the market dropped 20% in one day (SPX 280 to 220, I believe it was 62 points) the market dropped because everyone sold. Selling stocks is not governed by the uptick rule, only shorting them is. So recently now that the rule has be revoked and we have now begun to see extensive volatility, I wonder what the future market will look like. For example in the past two months we've seen a few days where the SPX will travel 30 points in the last thirty minutes of trade (typically the SPX will travel 3-10 points in a day, as of the past year) going from highs to lows or vise versa! The biggest difference that I have seen has to be the time frames. My models have done an excellent job as of late in figuring out buying points and reversal points, however using past data my models may say it will take 3 days to get to point A but by mid afternoon of the next day we're there! One options trader used to tell me that he used a model that he called "adjustment point" that measured the distance traveled each day by the market, and when the distance traveled by the market in one day was equal to that of one week at an earlier time the market has evolved into a new market. It would also work the other way, when the market only traveled in a week what it use to travel in one day. These "adjustment points" are great tools for derivatives traders due to the mostly market neutral work that they do. My last point on this recent vol is that these major intra-day swings are caused by computer applications, however no matter what vol you're following, increases mean down. The NYSE can also apply something called a "collar" which "curbs" program trading, so that all non-human made trades are banned. These collars have been applied at least 4 times in the past two months that I know of... I believe 7 times over the past year.
Again I hope that people will point out their market observations. Mine tend to deal with volatility as that is what I am studying currently, however it doesn't matter what the anomaly, they all are very important to understand.
Steven C. Frable Administrator Executive Secretary - Temple Economics Society member is offline
Joined: May 2007 Gender: Male Posts: 73 Location: Philadelphia, PA Karma: 3
Re: How Markets Change « Reply #1 on Sept 1, 2007, 12:28pm »
Quote:
Now lets look at vol as of late. Vol is up substantially due in part to the recent sell off, but because we already know that high vol leads to lower stock prices, was the sell off that followed two months of high vol a surprise? Good answer!
I have been reading up on trading strategies regarding volume. I like volume because after all it has to do with quantity and price. Something I can easily understand thanks to an understanding of economics...supply and demand. Plus, I can put trust in the volume as well. Many have me believe that volume is the chief indicator of strength and weakness which is basically the painted veil for your entry and exit points.
What do you know about trading specifically on volume, assuming all your other analysis's, fundamental and technical, stay the same. This idea was generated by looking at several places on the net,
Re: How Markets Change « Reply #2 on Sept 1, 2007, 6:57pm »
Volume does play a big role in market movement, but in the quote you used I was talking about volatility. Vol is short for volatility... I don't really have an short version of volume. It's because when you talk to a derivatives trader their life revolves around volatility, but no one in investing has a life revolving around volume, so volatility gets the abbreviation.
Back to volume:
I don't ever talk about things I don't trade, and I don't trade on volume, however I have done extensive research so I will share that with you. All of the below is my own research.
Things I know about Volume:
High volume occurs at the apex of a trend.
Lower volume occurs directly after the apex of a trend, confirming a reversal. I say lower volume because it is relative to recent volume.
WHAT ULTRA LOW VOLUME MEANS: (figures below are volume extremes taken from indicies)
8.30% of the time the occurrence of low volume is at the bottom of a trend lower. (reversal)
16.70% of the time the occurrence of low volume is in the middle of a trend lower. (continuation)
41.70% of the time the occurrence of low volume is at the top of a trend higher. (reversal)
33.30% of the time the occurrence of low volume is during the middle of a trend higher. (continuation)
From the above statistics one knows:
50.00% of the time low volume is a reversal. Thus 50.00% of the time it is not.
More specifically:
If low volume occurs during a trend lower, 33.20% of the time it will reverse direction.
If low volume occurs during a trend higher, 55.60% of the time it will reverse direction.
Very good recent examples of this were on 8/8/07 and 8/24-27/07 when low volume signaled pull-backs in stock prices. Volume one may notice is a very short term indicator, for example it barely works for more than 2 maybe 3 days. As I had said above, very high volume tends to occur on key reversal days (key as in the key stone of an arch, or the apex) which was seen on 8/16/07.
The reason I do not personally trade this (at least for direction, whereas I do use volume predictions for scaleability purposes) is because look at 7/26/07 when the SPX was less than half way from it's recent bottom and volume spiked. Many people considered this a market bottom, and three large hedge funds were taken out because of action that occurred just days later. I don't know what those funds did wrong, but any model based on volume would have been utterly wrong, and it's not the first time. There are volume models that I am working on now, so get back to me in about eight months and I will most likely have some good stuff to share.
Note: For anyone that has read any of my posts, I do try to share many ideas as the point of this forum is to help educate, however I NEVER give away something that is not otherwise known, or cannot be found using simple research. Thus do not take anything I say and trade it believing you're one of two people doing using it.
Re: How Markets Change « Reply #3 on Sept 1, 2007, 11:20pm »
By the way I watched that video and the man talking had no idea what he was saying. If you watch closely you'll notice that the volume patterns he points out contradict themselves.
Also, the dots on his chart had nothing to do with volume. It was a Parobolic SAR indicator (stop and reversal indicator). It's available on most charting packages. If your brokerage doesn't have charting I would first go to esignal.com and see if you like any of their charting packages and then go to prophet.net and check them out. My prime broker has a deal with prophet.net and I really like their charts. If you want a broker with the best charts (free once you have an account) check out www.thinkorswim.com.
Re: How Markets Change « Reply #4 on Sept 2, 2007, 12:11am »
I just thought of something.... Go to www.shadowtrader.net and somewhere in there are the "video weeklys." They are free, so subscribe to them. They are about 6-20 minutes long each and are full of everything technical a beginning trader would want to know. Even if you have been trading for a while it's still good to hear what other people are doing, because AFTER you do your own research on the subject, their styles may work for you.
Also go to the archives and check out some of the past videos. Definatly watch anything with an extra label on it, especially the '5-minute-gap plays' because I think those are a great easy day trading strategy.
Pete (who does the videos) is a great teacher and these are definatly more fun than reading about these topics, because here you can see what's happening. One might also want to watch past videos surrounding major market events, such as February 27th (before and after videos) to see what real traders were thinking.
Steven C. Frable Administrator Executive Secretary - Temple Economics Society member is offline
Joined: May 2007 Gender: Male Posts: 73 Location: Philadelphia, PA Karma: 3
Re: How Markets Change « Reply #5 on Sept 6, 2007, 2:40pm »
I am overwhelmed with this stuff. Freakin advertisers played with my hopes and dreams again: That making money is easy.
Those numbers are interesting though. What, if any, trading platform gives you the best up-to-date information in not only doing research for you at the click of the button, but is also amiable in which you can program your own instant researched indicators at the click of a button. And this trading-platform also is synched up to the market by the millisecond, saving every peice of market data ever created, since the 1970s perhaps. Am I dreaming of something that doesn't exist cuz if it does exist I would like to know about it.
Concentrated power is not rendered harmless by the good intentions of those who create it. - Milton Friedman
I can't understand why people are frightened of new ideas. I'm frightened of the old ones. - John Cage
In true dialogue, both sides are willing to change. - Thich Nhat Han
Steven C. Frable Administrator Executive Secretary - Temple Economics Society member is offline
Joined: May 2007 Gender: Male Posts: 73 Location: Philadelphia, PA Karma: 3
Re: How Markets Change « Reply #6 on Sept 6, 2007, 2:41pm »
BTW, parabolic SARs after never helped me in determing where a stock price will be going. I don't run the numbers like you do so maybe that might be a good research idea to look at.
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