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Beau Reed
Beau Reed

Stock Market Logic: A Sophisticated Approach To... [Extra Quality]

This article is a prologue to the article "Why Markets are Inefficient: A Gambling 'Theory' of Financial Markets for Practitioners an Theorists", available here: =2925532. It presents important background for that article - why gambling is important, even necessary, for real-world traders, the reason for the superiority of the strategic/gambling approach to the competing market ideologies of market fundamentalism and the scientific approach, and its potential to uncover profitable trading systems. Much of this article was drawn from Chapter 1 of the forthcoming two volume set of books, "The Strategic Analysis of Financial Markets."

Stock Market Logic: A Sophisticated Approach to...

Keywords: market efficiency, market fundamentalism, behavioral finance, strategic analysis, game theory, stock markets, trading, investing, rationality, the no-arbitrage principle, market anomalies

The most popular signal for the positive volume index is when the index drops below its 1-year moving average. Fosback believes that when this occurs, there is a 67% probability that a bear market is fast approaching.

In summary, the PVI is a great tool for staying on the right side of the market when trading low volatility stocks. However, if you are planning on trading penny stocks or fast movers, you will want to use indicators that are more reactive and are leading.

The second and most vital truth that drives the stock market is the collective psyche of the market. This powerful force is not driven by reason or logic it is impulsive by nature and is far more complex. In fact, over the last 20 years I have been developing a theory of understanding the beast which I call, The Market Complex in my started but far from completed book.

There are many different approaches to understanding the collective psyche of the actors comprising the buying and selling of a stock market. While I am attracted to approaches that involve modelling, this can in itself be a dangerous trap that belongs to the fundamental truth approach and should therefore be carefully handled so as not to be confused with the Market Complex.

My intention for this article is not to go into any great depth on these topics but to rather provide a lens through which you dear reader can see how the stock market is not just doing battle at the micro buyer and seller level but rather the direction of the market is heavily influenced at a more macro level by the twin truths of the current fundamentals and the prevailing market complex.

This is the reason why the stock market and trading it is not something you crack through a single formulae approach, rather it is far more complex and unpredictable. The true market specialist has the skill of diagnosing two relative truths and making sure to position themselves for when these 2 planes align in rare absolute truth.

About a decade ago, when legal employment dipped sharply, there was a raging debate on the future of the legal profession. Some said the drop reflected a permanent decrease in legal work. The logic here was simple: computers were increasingly capable of completing more sophisticated projects. Having eclipsed paralegals in some document review tasks, they would, we were assured, soon supplant attorneys at writing briefs. These techno-utopians also evoked (what they called) a market logic: the more competition pressed firms to become more efficient, the more software they would deploy.*

Much like a sporting event or a film, the act of investing invokes emotion. Portfolio management can be dramatic; the ups and downs of the stock market, sudden losses of value, the elation when a fund has trebled in a day, the fury that accompanies a bad decision.

An individual investor may be perfectly capable of managing money and taking a sophisticated approach to a portfolio. However, there is evidence that the same educated investor falls prey to decision biases that impact performance negatively.

Nowhere is this more visible than in the world of mergers and acquisitions. How often have we seen the stock market get really enthusiastic about a takeover deal or an acquisitive company, only to have a rude awakening later on, when the dust settles?

What of the opposite type of situation however? Companies that have done brave deals, but have been widely chastised at the time. These are particularly notable because the management and board had to fight many critics to pursue their strategies. The stock market initially voted that these were poor deals, but in the fullness of time, their weight may be reassessed. I will focus on three large deals in the UK that may fit the bill.

However the short term voting of the stock market could prove premature. The deal actually looks very interesting from two distinct perspectives; financial and strategic. Financially, Sainsbury paid 1.1 billion for Home Retail. Even allowing for the costs of integrating Argos, the potential extra profit should make this a very financially appealing deal.

These three examples are all situations where the stock market has initially been sceptical of bold strategic moves. Whilst it is too early to judge any of them definitively, and the Sainsbury deal has only just been completed, there are good reasons why history could look back at each of them as important, positive developments for the businesses concerned. The stock market weighing machine may ultimately have a different opinion than the voting machine. 041b061a72


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