Behavioural Model.

Wednesday, May 02, 2012

What a difference a day makes. "Sell Aud? Australia? Where's that?  We are back to selling Europe again".

TMM's Bloomberg IB chat bias-o-meter would have us believe that we are about to have a Euro panic similar to that of 10 days ago. If that is any indication of the size and commitment of short term positions then really the price moves so far aren't that impressive. We will not get sucked in (though we may get spat out of existing positions).

But it doesn't matter if we are right or wrong in our method, prices change because people decide levels at which they are willing to trade. So no matter how much we believe in our methodology, no matter how much it can mathemematically be proved correct, no matter how much our theory, or even what we thought was everyone else's theory, tells us we are right; if everyone else is reacting for different reasons then our ultimate reward for rightness (profit on price movements) will remain elusive. Which is a long winded way of saying the market will remain irrational longer than we remain solvent.  This is of course why it is imperative to understand what drives other people to make decisions as much as understanding our own.

We often see the markets as a massive poker table around which sit thousands of players, all with their own different reasons to play and ways of playing. Understand all of them enough to pre-empt their actions and you can profit greatly. But that's nigh on impossible so we tend to group the types. We have in the back of our minds ideas for a piece on all the different types we have encountered over the years but that is for another day.

Instead today we have knocked up a behavioural model of how the markets work, very much from our own perspective. It's remarkable in its familiarity. No prizes for guessing which one we are.

Posted by Polemic at 12:21 PM  

12 comments:

interesting thoughts TMM. I have also thought about trying to model the different players in the market as a means to hypothesize where prices are heading (given each groups goals/restrictions, trading strategies etc) but it is more theoretical at this stage, though I am sure there are some PhD's who have tried

Spanish equities taking on the chin again, Brazilian real looking to close about 1.90.

A poor NFP might see some real risk off .. ah I have no idea how to position now

abee crombie said...
2:39 PM  

When macro is weak, technicals are strong, and vice versa. Very rarely do we have the luxury of the obvious. So then we must ask the question, which is the lesser of two evils.

Anonymous said...
3:11 PM  

ps.........Amplitudeinthehouse says , wow, that jogged back the memories..Blinky,Pinky,Inky & Clyde chasing poor old Pac-Man tail....

Amplitudeinthehouse said...
4:17 PM  

LB taking cover under the desk today hoping to avoid Pacman's jaws. Happy to have some hedges on (short US small caps and energy stocks). Apparently there is a recession in Europe. Never would have guessed, one could believe that it is already mostly priced in here.

LB thinks US equities may be sold for the rest of the week but only down to consensus support levels. Watching EURUSD 1,30 as a critical factor. Too much dollar strength, for whatever reason, might bring the ceiling down, but we don't expect that to happen as the US data don't really support such a big FX move. Probably a good time to stay hedged and otherwise do nothing.

Leftback said...
4:30 PM  

I watched the video and all I saw were vampire squids.

Steve said...
6:45 PM  

Nice article, thanks for the information.

9:15 AM  

I love the notion that the direction of an underlying is simply a function of buyers and sellers alone. It is so correct yet people can go crazy racking their brains when something so obvious goes the other way.

Good stuff

www.1percentblog.com

Redrut said...
9:30 AM  

C Says'
Spain.Have not been to mainland for along time.However, just had a weeks sporting holiday at a camp in Fuerteventura. Oh dear me !If that island is a microcosm of Spain and it's property market it has muco pain to come. Frankly the best solution would be a bulldozer to level a lot of the crap they have thrown up.Climate,lack of maintenance etc etc means other than land I doubt if some of this stuff has a realisable value.I'm not exagerating. One example, prime seafront 30 small detached villas and only one occupied.All already showing various signs of wear at least in part from shoddy building. Of course behind that lot are acres of others which were they in the UK we would normally call them a 'sink' estate.
The numbers are intimidating,but the reality of actually getting out a car and walking around this stuff making notes on what you see is worse.Obviously at some point in time the banks will have to take this reality and it's long way from the nonsense they are trying to pass of as balance sheets.
First time I have actually got up close to this issue and as bad as I thought it was I now think I underestimated it.

Anonymous said...
9:36 AM  

Agree with the last comment re Spain. Anecdotes vs data etc, but the sheer horror show on the ground made a strong impression on me.

Re the PacMan post, another sporting analogy might be that you are playing chess while the market is playing noughts-and-crosses.
Pol: "Bg5! Threatening to swap off the Nf6, allowing us to exert a big clamp on d5"
Mr Market: "Three X's in a row...suck it!"

VandalsStoleMyHandle said...
11:08 AM  

Hi C

Great comment, you nailed it. Except it is worse...the shoddy crap they built on the land actually has negative value as buyer has to pay to remove it if they want to build something into land they just bought! Ho ho ho!

Spain is as bad as Ireland...probably even worse. You got all these massive developments around cities like Madrid , all empty, ghost towns.

Tradebot said...
12:29 PM  

C says'
I relans is in much better shape than Spain because they don't have any excess inventory although you only realise this at night when the fairies and leprechauns leave their squats.

Anonymous said...
1:24 PM  

Ok so Draghi "remains hawkish" but intellectually/econ101 speaking is there any way ze Euros get out of this sordid mess without EUR/USD moving swiftly towards parity? I can't fathom it happening any other way but maybe I'm being obtuse.

Anonymous said...
3:03 PM  

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