Thursday, February 25, 2010
Welcome to the Land of Oz
Following up on the comments to the last post regarding the classic work of Frank Baum, The Wonderful Wizard of Oz.... ...or, more accurately, the Land of Oscar Zoroaster Phadrig Isaac Norman Henkel Emmannuel Ambroise Diggs...
I was reminded of the book when Rhonda Smith, a scarecrow, sniped in congressional testimony, "Shame on you Toyota for being so greedy!" (which absolutely convinced me that she made the whole thing up and Toyota is being railroaded ACORN-style).
You see, Toyota is a Tinman with a smokestack hat. Stupidly dependent on oil, he has to get bailed out by the common folks. Ah, if he only had a heart...
And if the panic-stricken scarecrows like Rhonda, who freak at the mere thought of fire only had brains, they wouldn't be so easily manipulated...
And if our Cowardly Lions only had the courage to stand up to the establishment, (fill in your interpretation here, but I think it's about duping us into costly wars, happily pledging others peoples' money and lives)...
Then Dorthy could click her free silver (in the original book the ruby slippers are silver) heals and take us home, and we wouldn't arm-in-arm, singing down the yellow brick road to a fabled Emerald City in the wonderful Land of Oz.
Same fears and irritations, 1896.
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After a day like today the title of your post seems appropriate. You would think the dollar had fallen to 74 and gold was at a new high from the righteous hyperbole I've been reading but all I see is a vice containing long and short n*ts receiving an equal opportunity squeezing.
ReplyDeleteOh that this only sets the stage for a nice pop to 1112.43+ tomorrow am, followed by a fade to say, 912 by the middle of April? Bring it.
FDR -
ReplyDeleteI know that you believe with the utmost conviction in the "heard mentality" That we are all programmed by nature to be fearful when everyone is fearful, and greedy when everyone is greedy.
I have been reading your posts for years (back to the marketwatch days when you were blogless) I know you feel that the stock market is like a flock of birds and that even though we think we are clever, we are no more clever than the bird to the left or right of us.
I have to question this theory as it relates to the stock market. I am not saying I disagree with you, but I can't say I agree either. Here is why.
The majority of trading in the stock market is not done by humans today, it is done by computers. I know the algos are programmed by humans, and as such are not perfect by the nature of it. I just don't *think* that the stock market today can be compared to the stock market of 1929, or when Elliot came up with EWT.
I want to go on, and on, and on...but I think you get the drift of what I'm saying. I don't really have a question but I am very interested to hear what your thoughts might be on the issue I brought up.
Thank you for this blog. I happen to find you one of the more intelligent blogs on the internet.
"The majority of trading in the stock market is not done by humans today, it is done by computers. I know the algos are programmed by humans, and as such are not perfect by the nature of it. I just don't *think* that the stock market today can be compared to the stock market of 1929, or when Elliot came up with EWT."
ReplyDeleteWhen I first learned about EWs, I was incredulous. I was intrigued by the theory as it makes basic sense, but I thought there was no way in hell it could be a true or useful representation of the stock market.
Being generally open minded, I looked for the fractal patterns anyway, and immediately found some. So I kept at it. To my shock and amazement, not only was it true, it was more useful than the potential realm at which I scoffed.
If you knew how many times I calculated individual stock peaks to the penny, you'd believe too.
I've traded stocks where every W1-2 looked virtually identical in wave form, only the scale changed at different fractal degrees.
After one of those stock made a sharp W3 peak and then huge W4 correction, as a "magic trick" for some "non-believers, I drew the next small degree W1-2 price pattern, in advance. It represented a very sharp reversal, and I knew it would take nearly the exact form of the large degree W1-2 before the 3. They watched a perfect match appear in abject horror.
You can't get that kind of resolution very often, but I suspected that stock would be reliable enough.
I don't EW analyze individual stocks very often anymore. I know I can, but its more work than I have to do. I can stick to macro analysis and work very little. Especially during forest fires, which yield much faster, larger returns than chasing a million seedlings as they grow. I love deflation.
So all I can tell you is this. If you do EW long enough to really learn how/why it works (no one can really teach you), you will come to realize that not only is it a correct model market behavior, but it will exceed the limits of what you currently imagine.
That doesn't mean it is always predictive. But sometimes and at certain degrees, it is.
Oh, and as far as computer trading goes, what makes you think the smart money doesn't trade the EWs? They do.
ReplyDeleteI think computer trading makes EWs more, not less useful, because it's easy for pros to gang up on the masses without formally communicating.
FDR -
ReplyDeleteI asked the question above.
I have another question...
If the EWT works, sooner or later everyone will be using it. How can everyone use it and make money? At somepoint your method (or the EWT) will surely fail. Or are you more unique than others in thinking they have "figured out" the market?
See...this is my problem. You are saying you have the market figured out using EWT. Once everyone starts using it...it doesn't work anymore.
So whats the rub?
FDR wrote: "I think computer trading makes EWs more, not less useful, because it's easy for pros to gang up on the masses without formally communicating."
ReplyDeleteExcept the "pros" account for the majority of volume in the system, do they not?
If that's true, and all the pros are using EW because it's been proven to be the most effective predictor of the markets, won't that naturally have the effect of causing the markets to stop being predictable via EW?
If not, doesn't that imply that EW doesn't have predictive power? After all, market trading is ultimately a zero-sum game: for one person to win on average, someone else has to lose on average. Therefore, if two EW traders are at odds with each other, one will lose despite using EW as the basis of his trades, and thus illustrating the lack of EW's predictive power, for if EW is right only 50% of the time then it is no better than chance as a predictor.
"If not, doesn't that imply that EW doesn't have predictive power?"
ReplyDeleteI always try to emphasize, EWs are not necessarily predictive. You aren't looking at the future, only the past. But those who don't understand, cannot see the past, so it's still a huge advantage.
The market isn't really zero sum, but sure there are EW traders of all stripes and capabilities. I'd say 99.957% of the money in the market have never heard of it..
Of the small fraction using it seriously, I haven't found very many that actually understand it. Maybe 5 people in total that generate useful analysis. I've seen gazillions of bad EWs.
I always get questions like this and there is no way to ever convince someone the EW is useful. Most will never accept it, nature says so. That's one reason I started portfolio watch., give it a year and it will be self explanatory.
I have no interest in convincing anyone. I hope people shun it, entirely.
FDR wrote: "I always try to emphasize, EWs are not necessarily predictive. You aren't looking at the future, only the past. But those who don't understand, cannot see the past, so it's still a huge advantage."
ReplyDeleteInteresting. If EWs aren't predictive then what exactly are they good for? Understanding the past is well and good, but if it gives you no insight into the future (hint: that's the same as predictive power) then why bother, except for the enjoyment you get from the intellectual exercise?
"The market isn't really zero sum"
Sure it is. Those that participate in it can't get more cash out of it in total than they put into it. That's what zero sum means. It may not seem to be zero sum to an individual trader, but that's because the individual trader isn't seeing the other side of the trade (nor does he necessarily care about it). But the system is zero sum.
"I always get questions like this and there is no way to ever convince someone the EW is useful. Most will never accept it, nature says so. That's one reason I started portfolio watch., give it a year and it will be self explanatory."
The portfolio isn't a test of EW. It's a test of you. You say there are "bad" EWs and "good" EWs, but unless there's an objective means of telling the difference between the two ahead of time, it's just another technical analysis tool.
I'd wager your portfolio would perform the same whether or not you made use of EW.
"I have no interest in convincing anyone. I hope people shun it, entirely."
If I'm right, it doesn't matter whether or not others use it, because if my suspicions are correct, it doesn't have predictive power in and of itself.
FDR said "The market isn't really zero sum"
ReplyDeletekcb said: Sure it is. Those that participate in it can't get more cash out of it in total than they put into it. That's what zero sum means. It may not seem to be zero sum to an individual trader, but that's because the individual trader isn't seeing the other side of the trade (nor does he necessarily care about it). But the system is zero sum.
I have to agree with FDR on this one. There are a LOT of people putting shoes on the feet of their children at the expense of both the buyer and the seller of equities. Everyone who handles the trade takes a bite out of the value of the trade.
Anonymous said: "I have to agree with FDR on this one. There are a LOT of people putting shoes on the feet of their children at the expense of both the buyer and the seller of equities. Everyone who handles the trade takes a bite out of the value of the trade."
ReplyDeleteLet me put it this way: whenever someone buys a stock, someone else is selling the stock. Someone who buys the stock is putting money into the market. Someone who sells a stock is pulling money out of it. Since every transaction is like this, where every move to put money into the market is countered on the other side of the same trade by a move to pull the same amount of money out of it, it follows that the market must be zero-sum, because the sum total of the money going into it minus the money coming out is zero. If each transaction is itself a zero-sum transaction, then the total market must also be zero-sum.
Yes, there are additional fees tacked onto that, but those don't go into the market itself and aren't part of the market itself. They are added on.
"Let me put it this way: whenever someone buys a stock, someone else is selling the stock. Someone who buys the stock is putting money into the market."
ReplyDeleteIn a deflation:
Who ever is holding the stock is losing money, whoever is holding cash is making money. Whether or not the stock trades is irrelevant.
If banks suck all the cash out of circulation, and not a single stock trades, everyone holding stock loses 100%.
FDR wrote: "Who ever is holding the stock is losing money, whoever is holding cash is making money. Whether or not the stock trades is irrelevant."
ReplyDeleteYes, that's correct.
I was referring to a zero sum game in terms of currency. Clearly the value of currency changes over time. All markets are affected by that.
It's a real shame that society has ingrained into us (on purpose, of course) the notion that currency and money are the same thing, and calls it "money". It's a very hard thing to completely disassociate from. I do try to, but obviously fail sometimes (as in this thread).