6c. Tales on image variations
& behavioral finance
Stocks were found dead. Whodunit?
Sherlock found four suspects, but he hesitates to name the culprit:
- But, Sherlock, they had an alibi: there were no fundamentals, just business
plans and stock analysts consensus!
- Dear Watson, I always look suspiciously at fundamentals, and even at the
lack of them.
Technical factors, such as liquidity?
- Did you noticed, Sergeant, how come liquidity ran away,
And precisely the day people wanted to start selling?
And by the way, where did liquidity came from, when the market was
- But, dear Lieutenant Colombo, from you and me, as you taught us!
- Dear Sergeant, I'm always suspicious about liquidity, even if I'm
the one who provides it.
- Is it not puzzling, the way it changed direction, from bull to bear?
And before or after that, from bear to bull ?
- Dear Hercules Poirot, I always found bulls and bears suspicious
animals, even if I'm one of them.
- How come so many gurus, media, funds, brokers told us one thing
and practiced another?
Just a lack of attention, I suppose?
- Dear Holmes, I'm always suspicious of info and advices given to me
for my best interest.
A hard case! Maybe you will find some hints in this site!
Bears, bulls, ostriches, pit bulls
Ever visited the stockmarket zoo?
You would learn that most market trends, whatever their direction (bearish
Start with a "ostrichian" phase, a period of under-reaction to news
about economic / financial changes.
Among the various species in the zoo, only some are ready to accept
an immediate change in what they are being fed.
Move on to an "adjustment" phase to the new food. Investors get used
to the new environment, as the result of a cascade of confirmation news.
But, still, not all species are completely convinced in that phase.
Just because the live stock is fed with red herrings :
* bearish trends are littered with false rallies.
* bullish trends plagued with false setbacks.
End with "pitbullian" phase, an over-reaction.
Here, everybody in the herd wants to move in the same direction
(wolf pack / funnel effects)
Do we need an economy?
No, that killjoy stuff has no other use than to perturb the stock market.
Between two transactions, do stocks have a price ?
Philosophers and scientists are still looking for an answer, only
accountants are artists enough to think they know it.
When does a bullish trend stop?
Either as soon as you buy, or a very long time after you sell.
What is relative strength? (contributed by Leif Ericssen)
In some cases, a contest between people with more money than
brains and people with more brains than money.
Are designer clothes and the stockmarket the same business ?
No, they are quite different, in the stockmarket, fashion changes
are more irregular, and bargain sales more brutish.
Are academic financial theories wrong?
No, they are only different from reality
Volatility comes in three flavors
Volatility is a fuzzy buzzword. Under the same Greek letter, several completely
different phenomena co-exist.
But each one with its own logic and arithmetic, so don't confuse the flavors:
Plain vanilla volatility
That is a very mean flavor. In "normal times", prices and returns try
to reach an "equilibrium" around the mean.
The "standard deviation" from the mean is an official measure of
It shows the remaining uncertainty in evaluating stocks, whatever
the quality of the information available.
Thus it reflects the investor hesitancy that goes with it.
When fundamentals, or evaluation paradigms move brusquely or
cumulatively from a state to another, forget about regression to the
mean! We are in chaos changes, here.
The flavor gets erratic, beware for your stomach, it might churn.
Often, blindness (sorry, cognitive dissonance, to talk technically),
greed, fear and herding dominate the market.
At first, the "momentum" gets born. Often timidly and progressively,
the poor thing hesitates to leave the womb (under-reaction).
Then it grows, and it may run amok (over-reaction). It brings prices
and returns to extreme lows or highs (see images table B). Pareto /
power law stuff here, 20% booze, 80% fruit.
So, how to enter some strong flavor - and why not, drunkenness - in the sober,
politically correct, but hopelessly short-sighted, Markowitz-Sharpe or Black-
Scholes models? And how to make live happily together three different, or
even opposite, math's, in the same "Greeks"?
Love your market commentator!
Every day the market goes up or down
Every day some commodity, currency, stock goes up or down more than others.
Often the reasons are obscure. The move is just a noise.
Or the motives are real, but the buyers or sellers will not tell them, why
Here is the challenge for commentators. They have to find some explanation,
to invent some "good story". An artistic job.
Sometimes a bit stressful, I suppose.
But socially rewarding, people love commentators.
The imaginary value (see contribution from Winnie)