> various "experts" are warning that the market is shaky because many stocks are going down and a small number are going up.
> "divergence from the mean"
> "Convergence to the mean"
Reversion to the mean was one of the basic characteristics of stock markets in traditional theory. If a stock price grew to exceed the value of the company, the stock price would tend to fall back toward that value. If a stock price dropped to less than the value, then the stock price would tend to increase back toward that value. Other characteristics were low trading volume and low volatility (by today's standards).
This was all that was taught in schools up to say 10-15 years ago. Stock market experts with (now) many years of experience, they learned that, used it day in and day out for tens of years, and came to believe that that was the only normal and natural way markets could behave.
The current market and the tech market in particular are characterized by divergence from the mean, high volume, and high volatility.
This is a fundamental shift, yes. But to the old folks (pardon the expression), they learned the hard way, they *BELIEVE*, and thus the modern stock market is an aberration, and *MUST* correct, or else their beliefs that they have based their working lives on are false. They are human, therefore many of them say the market will correct.
If the fundamental shift is real, there must be a reason. This is the explanation that I favor.
University economics departments have always (since the Depression anyway) been trying to model stock markets, whether on paper or computer. The model is a theory, and must be able to explain past stock market facts, and must be able to predict (to some degree) future stock market events. If you plug numbers and time into the model, the outputs of the model should look like stock market events and results. A major component of any such model is human behavior, such as greed, fear, time horizon, and so forth.
The old models do not explain the current market. But, it turns out, in order to construct a model that explains both old markets (reversion, low volume and volatility) and new markets (divergence, high volume and volatility), all you have to do is take the old model and alter the human element a little, by making greed and fear expectations change more often.
That is, the more you can keep people's hopes and doubts changing from day to day, the more they will trade, and the more insecure they will become. More trading gives volume and volatility. Insecurity causes volatility, and supports divergence from the mean (think security blanket, herd behavior, traumatic financial conditioning, etc :-)
[It is my understanding that the above two paragraphs are reasonably well accepted at the university postgraduate economics level these days. Lots of PhD theses are available on the web.]
So, why are investor's expectations changing, particularly now with great country, great economy, full employment, no wars (relative to other times)?
Well, look at it like a detective.
Motive. Who benefits from high volume and volatility? Brokerage houses. Commissions.
Opportunity. Who can change investor expectations? Brokerage houses. Upgrades and downgrades. Parading analysts. Whisper numbers. Want to keep the investor scared? Just run the stock price up and down like a yoyo for a couple of days.
Crime. Remember QCOM November expiration week? 406 Monday, 330 Tuesday.
Whipsaw the investor, change his expectations every week, and he'll trade a lot, and make the brokerages rich.
Personally, I think the brokerages started getting into this during the 69-82 bear markets when their commission business was slow. If you wanted to keep your job as a broker, you had to generate commissions. Like advertisers and computer makers and television evangelists, brokers and houses have gotten better and better at it over the years.
I think that whipsawing used to be just an easy way to increase commissions, but now it has become a primary tool for keeping big brokerage accounts. The brokerage offers those accounts stock purchases at below market prices. "Steelworker's Pension Fund wants 500,000 shares of QCOM? No problem, sir, we appreciate you keeping your account with us! We'll just have our market maker take the stock down 20 or 25% this afternoon after lunch, and you can buy as much as you want."
Evidence you ask? Well, this isn't a court of law. But, how disgusted do you get with the apparent idiocy of TV and web stock columnists trying to explain *why* the market went up or down, how often have you seen Lehman downgrade a stock today and Merrill upgrade it the next Monday, and have you watched QCOM's ticker much lately?
This is why I agree about 90%+ with Voltaire's views on manipulation by the Houses. It's a clear situation where the Houses *can* make lots of money, and because they can, and are human, that is what they are doing and will continue to do so.
Back to original topic, divergence/reversion/will it last?
Sure it will last. SEC isn't going to do anything. Investors are not going to wise up. Houses are not going to succumb to an attach of conscience. Sigh.......
[thank you for listening, good to get that off my chest!]
- Dway |
