Thursday, May 17, 2012

Compression of Time Frames and Risk Aversion


One day left at current job! I have all of next week off until after the holiday weekend before I start at the new place. A week of fishing is on tap. Weather should be good, no complaints. If any readers have tips on placing and using a minnow trap, please leave it in the comments or shoot me an email. I bought a trap so I can maybe get some live bait for some river drift fishing techniques I want to try out. Thanks.

Compression of Time Frames and Risk Aversion
Last Thursday I wrote a post about The Transmission of Information and how that may be skewing old reliable data sets and sentiment readings. Tonight I wanted to expand on that post while keeping it simple.

In last Thursday's post I wrote this section:
And so my question in light of the following:
-Zero lag for financial information flow
-What was once insider "knowledge" that had controlled dissemination now makes the rounds freely
-Financial conditions are no longer an "also ran" for the regular news cycle; after the banking crisis market stories very often lead national news broadcasts
-The reduction (maybe removal) of retail money from markets (Mom and Pop)

Could the speed of light transfer of information and the concentration of market professionals in the same pool of money be changing readings and metrics? Are investment time frames compressing because the window for an edge has become smaller?



As always Kevin Depew (now with Bloomberg Brief) figured largely in that line of thought and once again in an exchange today about how the parameters of "risk" have grown so much smaller. I was thinking about this once again. (It should be noted Kevin's writing way back in the mid 2000's and interaction with me inspired this writer to start my own blog.)


We are visual creatures and so I am posting the following two charts that I believe give an idea how both time frames and risk aversion have compressed.


SPY Weekly with notes (Click for larger view or view here):
SPY Daily with notes (Click for larger or view here):


Now I understand that in the wake of an epic credit collapse that market gyrations may be more wild than normal. I also understand that one can chart squiggly chart lines in many ways to present a point they want to see. That said, given the questions posted above the charts make a compelling case that things are moving faster and risk aversion is getting much more reactive. 


The AAII sentiment readings have been so bad, I actually wonder who they are talking to. The October lows were horrifying and to me the November wash out near Thanksgiving was about as bad as any time I have ever felt about markets. Real time indicators like regular bloggers and Twitter were at wits end at those points, but now I see eager buyers. Buyers ready due to......those indicators. Something is changing under the surface. The interface of social media, light speed information transfer, and much less 'dumb' money is making a learning computer that is reacting both faster and with more energy. The Robopocalypse has many faces I guess.


A clip from the film "Rounders" may best illustrate my point.


Who can forget when Mike makes his return trek to poker, goes down to Atlantic City, and finds he will be playing against, and with, the same set of New York ringers that dominate the money games in the big city? Of course some unlucky tourists make their way to the spider web, but strategy changes and opportunity is cut down because of a table full of pro's:

Interesting.


I fully admit I may be way off here, but it just seems to this writer that the game has been, and is changing. I have a few more thoughts on this and will go further in a future post.


Have a good night.

7 comments:

Anonymous said...

An interesting thought exercise here as usual and an area ripe for discussion.

As perhaps an offshoot of the news flow compression observation, is it possible that we're all being gamed, only at a much faster pace today? Richard Ney's description of the market Specialist games makes for entertaining reading (though dated).

http://www.amazon.com/The-Wall-Street-jungle-Richard/dp/B00005X4AX

http://www.amazon.com/The-Wall-Street-gang-Richard/dp/0380003368

Ney was aggrieved at the practices of the market Specialists back in the day and spent a lot of time detailing the chicanery of Wall St. However, to the cynical, the phenomenon would seem to still exist even with the decline of the Specialist function....buy 'em at wholesale prices and sell 'em back at retail, playing retail investors for the fool while picking their pockets. I suppose this could be more sour grapes than anything else but it is very likely that more than a kernel of truth is there in any market, by various means. And certainly at a faster pace today.

With regard to compression, what I suspect is that John Q senses that news and events are moving beyond their capability to follow & therefore understand them. People that I talk to, intelligent but busy middle class, can't quite readily explain their apprehension but perhaps a synergy of speed and the scars of 2008 & Dotcom crash explain the constant flow of funds out of equities. Is 'retail paper' getting it right this time or about to have the football pulled away again? Not sure, but we'll continue to trade what we see inside #12631...

@gravestonedoji

GawainsGhost said...

"Hanging around, hanging around. Kid's got alligator blood, I can't get rid of him."

Matt Damon couldn't take out the crazy Russian until he recognized his tell. It was the cookies. Once he realized that, he turned his $10,000 buy in to over $60,000. Not bad for a late night poker game.

But the moral of that story is this. Investing is not a game. There's too much at stake.

If you ask me, I would simply say, protect your money. Anything that offers more than a 3-6% return is a scam.

Look at the Facebook IPO. The insiders are cashing out. But why now? They're getting out while the getting is good. Some think this stock is going to the moon. Actually, it probably won't get out of the atmosphere before it falls back to earth. So that's a sell if there ever was one.

People fall for this stuff all the time. You see those commercials on TV for some product that's supposedly worth $80 but that you can buy for $19.99. In fact, if you order now, they'll give you two for the price of one.

Now, if this were really true, everyone would be buying two products for $19.99 and selling them for $80 each. Spend $20 and turn it into $160. But that does not happen. Why? Because the product was never worth $80. It was only advertised as such. It wasn't even worth half of $20. It's worth, what, maybe $2 at a garage sale.

I am stunned that people don't realize this. It's the same with real estate, stocks and every other investment. If you like the product, if you want the product, if you can afford the product, then buy the product. But don't think it's going to make you rich, because it won't.

There is a lot of uncertainty in the markets these days. Bank runs in Europe, threats of war in the Middle East, the rise and inevitable fall of China, American politics and decline, insider trading, flash trading, false advertising, the list goes on.

Value is the only thing to invest in. I don't care how fast your computer can process information, if you don't know what to do with that information, you're going to lose money. And that is the bottom line.

GawainsGhost said...

I'm not going to say I told you, but I did tell you.

http://www.latimes.com/business/money/la-facebook-fail-20120518,0,5818946.story

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