Saturday, May 22, 2010

More Evidence On Liquidity Driven Markets

We have long asserted that markets have hardly been driven by 'fundamentals' but by either rising or ebbing tides prompted by inflation and inflation fueled psychology.

Today's market downside volatility appears to be showing the same manifestations in the US markets.

Let me quote Bespoke (bold highlights mine)

``One day in early April, 93% of stocks in the S&P 500 were trading above their 50-day moving averages while 7% were below their 50-days. Now the exact opposite is true -- 7% are above their 50-days, while 93% are below. And just like the reading rarely stays above the 90% level for long, it also rarely stays below the 10% level. As shown in the chart below, the indicator is currently at its lowest level since March 2009 when it hit 5%. During the depths of the collapse in late 2008, the reading got down to zero percent. At this point, investors have to decide whether or not they think things could get as bad as they did in late 2008."

So whether an upside or a downside, we seem to be seeing the same dynamics--where most of the movements of stock prices seem to be reflecting ebbs and flows of liquidity rather than individual performances based on micro dynamics.

To consider, US markets are deeper and more sophisticated as to supposedly exhibit more market pricing efficiencies, yet they appear to remain prone to changes in liquidity levels.

How much more with bourses of the lesser developed markets.

This reminds us of a quote from the legendary trader Mr. Jessie Livermore in Edwin Lefevre classic the Reminiscences of a Stock Operator

``Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature."

Yet, this seems to be another affirmation of our Machlup-Livermore paradigm

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