Market Reflections

Thoughts, ideas and musings on current state and evolution of financial markets

How can you predict future from the past

How can one develop a trading strategy based on past behavior of a market if the market changes? Good question. You can do it like the credit rating companies, fed, president’s office, IMF, … etc. by measuring arbitrary external characteristics (depth of downturn, job loss, factory utilization), comparing to the past recessions and arriving at a “rosy” forecast. Because this approach ignores the underlying reasons for good times or bad it carries little or no real value and requires constant revision. Of course, credit rating companies don’t do that unless they get paid for it and president’s office does it only if politically beneficial. On the other hand Fed buying trillion dollar worth of commercial paper based on these ratings may not be as risky as some think. Credit rating companies have been beaten up recently for their inadequate job during bull times and their ratings are right now adjusted much more toward negative than realistic. Not much to do with reality and useless for trading this way or other.

Despite the profound changes (plummeting volume – many lost their money and others are scared to step in, loss of credibility and increasing amount of misinformation …) the market has also characteristics that have not changed. It is still traded by people even much more so than recently. People’s trading decisions are guided by emotions like before on choppy markets. They still believe somewhat the advice from “big investment banks” even though these have lost much more money than they have. They still trust their money to money managers hoping its safe now that Madoff is locked up.
In short, use the market aspects that have not changed from the past to develop the forward looking signals for today’s trading strategy. Use these signals for trading until the market aspects signals are derived from change.
Happy trading, and watch out for change.

Side note:

“This credit crunch started off as a structured-finance crisis, when the market lost confidence in credit ratings and realized that risk had been massively under priced,” says Ed Grebeck, chief executive of debt strategy firm Tempus Advisors. “Now the government is relying on rating models for structured-finance asset purchases even though some of those have demonstrably failed.”

“Until the rating firms bite the bullet and develop forward-looking signals and methods, it’s going to be same old, same old, and their models can be gamed”

A Moody’s spokesman says the firm’s structured-finance credit committee “isn’t the final arbiter” on ratings.

About The Author

Raymond has been active on financial markets since 1989 mostly trading commodity and currency futures and options. Trading systems and strategies, statistical and empirical modeling of markets have been his focus almost two decades now. Few projects are listed on his website. Raymond believes that every person could and should take responsibility and protect his/her finances. At least to be able to identify scams and fraud before giving life savings to a crook. It is not enough to rely on government because way too often officials (elected or other) are part of the scam themselves. Whether their reasons are campaign contributions, cushy job or lack of knowledge to understand the consequences of their actions none will help the victim. Recent succession of governments each trying to bankrupt the country faster than the previous it may very well happen that the world largest Ponzi schemes Social Security and Medicare will go down with the country. Without prudent financial decisions now one may sorely miss every penny of his/her savings lost to scam artists and “professionals”. To help out Raymond is sharing with users his analysis and views on variety of economic, financial market and trading issues.


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