selloff - What We're Reading - StockBuz2024-03-19T03:52:33Zhttp://stockbuz.ning.com/articles/feed/tag/selloffMarket Complexity Could Trigger the Next Crashhttp://stockbuz.ning.com/articles/market-complexity-could-trigger-the-next-crash2017-09-12T19:49:04.000Z2017-09-12T19:49:04.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Complex systems are all around us.</p>
<p>By one definition, a complex system is any system that features a large number of interacting components (agents, processes, etc.) whose aggregate activity is nonlinear (not derivable from the summations of the activity of individual components) and typically exhibits hierarchical self-organization under selective pressures.</p>
<p>In today’s infographic from <a href="https://www.meraglim.com/">Meraglim</a> we use accumulating snow and an impending avalanche as an example of a complex system – but really, such systems can be found everywhere. Weather is another complex system, and ebb and flow of populations is another example.</p>
<h2 style="margin-top: 0;">Markets are Complex Systems</h2>
<p>Just like in the avalanche example, where various factors at the top of a mountain (accumulating volumes of snow, weather, temperature, geology, gravity, etc.) make up a complex system that is difficult to predict, markets are similarly complex.</p>
<p>In fact, markets meet all the properties of complex systems, as outlined by scientists:</p>
<p><strong>1. Diverse</strong><br />
System actors have different points of view. (i.e. bullish, bearish, long, short, leveraged, non-leveraged, etc.)</p>
<p><strong>2. Connected</strong><br />
Capital markets are over-connected, and information spreads fast. (i.e. chat rooms, phone calls, emails, Thomson Reuters, Dow Jones, Bloomberg, trading systems, order entry systems, etc.)</p>
<p><strong>3. Interaction</strong><br />
Trillions of dollars of securities are exchanged in transactions every day (i.e. stocks, bonds, currencies, derivatives, etc.)</p>
<p><strong>4. Adaptive Behavior</strong><br />
Actors change their behavior based on the signals they are getting (i.e. making or losing money, etc.)</p>
<p>And like the avalanche example, where a single snowflake can trigger a much bigger event, there are increasing signs that the complexity behind the stock market has also reached a critical state.</p>
<h2 style="margin-top: 0;">Markets in a Critical State</h2>
<p>Here are just some examples that show how the market has entered into an increasingly critical state:</p>
<p><strong>Record-Low Volatility</strong><br />
The VIX, an index that aims to measure the volatility of the market, hit all-time lows this summer.</p>
<p><strong>Bull Market Length</strong><br />
Meanwhile, the current bull market (2009-present) is the second-longest bull market in modern history at 3,109 days. The only bull market that was longer went from the 1987 crash to the Dot-com bust.</p>
<p><strong>Valuations at Highs</strong><br />
Stock valuations, based on Robert Schiller’s CAPE ratio (which looks at cyclically-adjusted price-to-earnings), are approaching all-time highs as well. Right now, it sits 83.3% higher than the historical mean of 16.8. It was only higher in 1929 and 2000, right before big crashes occurred.</p>
<p><strong>Market Goes Up</strong><br />
Investor overconfidence leads investors to believe the market only goes up, and never goes down. Indeed, in this bull market, markets have gone up 67 of the months (an average gain of 3.3%), and have gone down only 34 months (average drop of -2.6%).</p>
<p>Here are some additional signs of systemic risk that make complex markets less stable:</p>
<ul>
<li>A densely connected network of bank obligations and liabilities</li>
<li>Over $70 trillion in debt added since Financial Crisis</li>
<li>Over $1 quadrillion in notional value of derivatives</li>
<li>Non-bank shadow finance through hedge funds and securitization make risk impossible to measure</li>
<li>Increased leverage of banks in some markets</li>
<li>Greater concentration of financial assets in fewer companies</li>
</ul>
<p>In other words, there are legitimate reasons to be concerned about “snow” accumulation – and any such “snowflake” could trigger the avalanche.</p>
<blockquote>
<p>In complex dynamic systems that reach the critical state, the most catastrophic event that can occur is an exponential function of scale. This means that if you double the system, you do not double the risk; you increase it by a factor of five or 10</p>
</blockquote>
<p style="text-align: right;"><em>– Jim Rickards, author of <a href="https://www.amazon.com/gp/product/1591848083/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=1591848083&linkCode=as2&tag=visuacapit-20&linkId=571b0b6653a54990b26da8081820252f">Road to Ruin</a></em></p>
<h2 style="margin-top: 0;">The Next Snowflake</h2>
<p>What could trigger the next avalanche? It could be anything, including the failure of a major bank, a natural disaster, war, a cyber-financial attack, or any other significant event.</p>
<p>Such “snowflakes” come around every few years:</p>
<p><strong>1987: Black Monday</strong><br />
The Dow fell 508 points (-22.6%) in one day.</p>
<p><strong>1994-95: The Mexican peso crisis</strong><br />
Systemic collapse narrowly avoided when the U.S. government bailed out Mexico using the controversial $20 billion “Exchange Stabilization Fund”.</p>
<p><strong>1997: Asian financial crisis</strong><br />
East Asian currencies fell in value by as much as -38%, and international stocks by as much as -60%.</p>
<p><strong>1998: Long Term Capital Management</strong><br />
Hedge fund LTCM was in extreme distress, and within hours of shutting down every market in the world.</p>
<p><strong>2000: The Dotcom crash</strong><br />
Nasdaq fell -78% in 30 months after early Dotcom companies crashed and burned.</p>
<p><strong>2008: Lehman Brothers bankruptcy</strong><br />
Morgan Stanley, Goldman Sachs, Bank of America, and J.P. Morgan were days away from same fate until government stepped in.</p>
<h2 style="margin-top: 0;">Shelter from the Avalanche</h2>
<p>The Fed and mainstream economists use equilibrium theory, regressions, and correlations to quantify the markets. And while they pay lip-service to black swans, they don’t have a good way of forecasting them or predicting them.</p>
<p>Markets are complex – and only complexity theory and predictive analytics can help to shed light on their next move.</p>
<p>Alternatively, investors can seek shelter from the storm by investing in assets that cannot be digitally frozen (bank accounts, brokerage accounts, etc.) or have their value inflated away (cash, fixed-income). Such assets include land, precious metals, fine art, and private equity.</p>
<p></p>
<div style="clear: both;"><a href="http://www.visualcapitalist.com/market-complexity-trigger-next-crash/"><img src="http://2oqz471sa19h3vbwa53m33yj.wpengine.netdna-cdn.com/wp-content/uploads/2017/09/infographic-market-complexity-next-crash.jpg" border="0" /></a></div>
<div>Courtesy of: <a href="http://www.visualcapitalist.com">Visual Capitalist</a></div>
</div>To Buy The Dip Or Nohttp://stockbuz.ning.com/articles/to-buy-the-dip-or-no2011-01-23T05:40:27.000Z2011-01-23T05:40:27.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><span class="font-size-4" style="color: #c0c0c0;"><em>“There is time to go long, time to go short and time to go fishing”  -Jesse Livermore</em></span></p>
<p><span style="color: #33cccc;"><em> </em></span></p>
<p><span style="color: #33cccc;"><em>"What happens after a <strong>fast, <span style="color: #ff0000; text-decoration: underline;">high-volume</span> 2-3-day sell off</strong>. There are three major scenarios:</em></span></p>
<p><br />
<span style="color: #33cccc;"><em>     - a stock move sideways on a low volume as it finally find bidders. Some will interpret this price action as the forming of bear flag. Others will look at it as the forming of a new base, which is an important prerequisite for higher prices in the future as it is likely to attract fresh money. Both groups could be right and that dispute will be solved only by price – in which direction is the stock going to break out from its new range.</em></span><br />
<span style="color: #33cccc;"><em>     - a stock continues to fall down in an accelerating fashion, breaching all obvious support levels; such action often leads to a sharp V-shaped recovery at some point as shorts decide to cover and new longs enter, attracted by the new price levels;</em></span><br />
<span style="color: #33cccc;"><em>     - a stock bounces sharply from one of its rising major moving averages, as the 50-day for example. Those that are today’s buyers of those dips are likely to be tomorrow’s sources of selling as time horizons tend to shrink during market corrections. </em></span><br />
<br />
<span style="color: #33cccc;"><em>It is always useful to watch how the market reacts as stocks correct. It makes a lot of sense not to buy blindly declines to major moving averages at this point, because you don’t know in advance if there will be an immediate bounce. It is better to wait for the stock to form a base. As I mentioned already, some of those bases will be bear flags; some will be a launching pad for another move up."</em></span></p>
<p> </p>
<p><span style="color: #33cccc;"><em>"While it is true that most momentum stocks are still above their rising 50-day MA or with other words, there is no technical evidence that their move is over, <span style="text-decoration: underline;"><strong>we have to be blind not to pay attention to the high-volume selloff last week</strong></span>. Is it the beginning of something bigger or just a temporary setback, designed to flush the weak hands out, no one knows for sure. The major market moving averages are in an uptrend too, by all definition of the concept. The truth is that they have always hidden more than they have revealed. Underneath the surface, small caps were ditched, trends in individual names were broken.</em></span></p>
<p><em><span style="color: #33cccc;">After a few days of high-volume decline, many stocks tend to move sideways. Some of these stocks will form bearish flag and continue their correction; other will build a new base, which will be a launching pad for future price appreciation.<br />
<br />
We are in the midst of an earnings season, where every report has the potential to make or break a trend as new information changes perceptions of value and risk. The stock market is a forward looking mechanism that tries to discount proactively and this is one of the foundations of momentum moves. We mentioned on numerous occasions here that most stocks appreciated significantly before the earnings season began and the elevated expectations meant trouble for stocks that did not live to their reputation. We saw $FFIV losing 23% overnight, which essentially wiped out its price appreciation for the last three months.<br />
<br />
In the financial market, as in life, reaction to news is far more important than the news itself. The selloff in $AAPL after reporting the most stellar quarter in its history just does not feel right. It is naïve to assume that option pinning has the power to stop $AAPL after such earnings report. The risk appetite on the long side seems gone, at least for a while. One of the major underlying conditions of bull markets is the positive market reaction to almost all type of news. This condition is nowhere to be found today."</span></em></p>
<p><em><span style="color: #33cccc;"> </span></em></p>
<p><span style="color: #c0c0c0;"><em>The above excerpts from @Ivanhoff, Managing Director of Stocktwits50.  Original posts can be found <a target="_blank" href="http://bit.ly/e9r9Xm">here</a> and <a target="_blank" href="http://stocktwits50.com/2011/01/20/dont-buy-the-dips-blindly/">here</a></em></span></p>
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