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<DIV>Here is a neat Web site I just discovered.<BR><A
href="http://www.mathworks.com/products/demos/webserver/webstock1.html";>http://www.mathworks.com/products/demos/webserver/webstock1.html</A><BR>It
forecasts price of a stock using Black-Scholes.<BR>I suggest you change the
Number of Similuated Paths to 1 to remove clutter.<BR>Also start the Annualized
Volitility (percent) at 1 % and walk it up to 50 %<BR>in say 20 steps.<BR>See
how the "noise" overwhelmes the trend?</DIV>
<DIV> </DIV>
<DIV>
<DIV><FONT color=#000000 size=2>George</FONT></DIV>
<DIV><FONT size=2></FONT> </DIV><BR></DIV></BODY></HTML>
</x-html>From ???@??? Wed Mar 01 21:39:43 2000
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From: "gposnak" <gposnak1@xxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Subject: [RT] prob and statistics
Date: Wed, 1 Mar 2000 21:22:03 -0800
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<DIV>
<DIV><FONT size=2>This is a message I sent to a trader. I wonder if it might
stimulate a <STRONG>line of thought on probabiltiy and statistics</STRONG>. I am
looking for a <STRONG>good visualization for a </STRONG><STRONG>Gaussian
process.</FONT></STRONG></DIV>
<DIV><FONT size=2>George</FONT></DIV>
<DIV><FONT face=Arial size=2></FONT> </DIV>
<DIV><FONT face=Arial size=2></FONT> </DIV>
<DIV><FONT face=Arial size=2><BR> </DIV></FONT>
<DIV><FONT size=2>There is a great tape of a lecture by Richard Feynman on intro
to Quantum Mechanics. His deep baratone voice booms out "..nobody has any
machinery behind the law...nobody understands any more than I just
explained...nobody will give you any deeper representation of the situation...we
haven't any ideas by which this thing is a consequence... there isn't any 'how
does it work' in any mechanical sense... I'd like to emphasize the very
important difference between classical and Quantum Mechanics. All the time we're
talking about the probability that an electron will arrive in a given
circumstance...it would be impossible to predict exactly what would happen, you
can only predict the odds...Physics has given up on the problem of being able to
predict what happens in definite circumstances ...<STRONG>the only thing that
you can predict is the probability of different events</STRONG>..."
</FONT></DIV>
<DIV><FONT size=2>When one starts from a premise of Gaussian distribution of
price changes ( for Black-Scholes it was difference in logs of price) one gets
different forecasts or realizations each time you run the simulation. If
the process is tightly constrained as in 2% volatility then all the realizations
will be in a tight up trending pattern (downtrend if you put in </FONT></DIV>
<DIV><FONT size=2>(-) expected rate of return). </FONT></DIV>
<DIV><FONT size=2>The key is the phrase voltility. I associate Blk-Scholes with
a standard deviation calculation about a moving mean. They equated risk with
standard deviation. If volatility is zero, the stock moves in a straight line
from 100 to 164 (in my example of 64% rate of return). All charts are 1 year.
</FONT></DIV>
<DIV><FONT size=2>(I had to cut off to fit but you can run the same simulations
at the Mathworks site. Having a cable modem let me run 10 simulations in 10
minutes.)</FONT></DIV>
<DIV><FONT size=2>As you add volatility 2% 4% 8% 16% 32% the noise eventually
swamps and overwhelms the trend. At 48% volatility(ie noise), you simply cannot
tell if there is trend. And for some reason they all become bearish as
volatility expands. Maybe this is a self fullfilling prophecy. Volatility causes
the smart money to head for a safe harbor. Remember the PBS special
"Trillion $ Bet"? To me the message was BIG BIG money is bet on these
kind of math models.</FONT></DIV>
<DIV><FONT size=2>This Gaussian distribution of price changes can be visualized
by any random process. Be carefull: many random gambling games such as roulette
produce random <STRONG><U>Uniform</U></STRONG> distributions not
<STRONG><U>Gaussian</STRONG> </U>. I visualize a dart board. If the dart lands
dead center the change in the dow is +or -500 pts . Not very likely. If the dart
lands in the outer most shell with the largest area the dow moves +-40 pts. Fire
21 darts. Where the dart lands gives you the <STRONG>change</STRONG> in dow pts
or % change if you want to use logs. Plot the dow for the month of March 2000.
Fire 21 more darts. Plot the dow again for the month of March 2000. Repeat 40
Marches. Now average all your March dart board predictions for the dow. That is
your forecast. I am of course giving you my simplified description of a
Monte Carlo simulation. The academics sophisticate it to the nth power. I don't
think they can beat an average day trader because their models don't respond to
conditions as they unfold.</FONT></DIV>
<DIV><FONT size=2>Probability books can give a better example than my dart board
but you get the idea. The thing about the market is that sometimes we get
<STRONG>runs</STRONG> of very large price changes. Volatility begets volatility.
Those distributions of price changes are not Gaussian. This is not taken into
account by the Gaussian academics.</FONT></DIV></DIV></BODY></HTML>
</x-html>From ???@??? Wed Mar 01 22:26:53 2000
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From: "JW" <JW@xxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Subject: [RT] FW: OIL has almost reached our upside target of 32.35--35.85
Date: Wed, 1 Mar 2000 22:05:47 -0800
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FYI...
JW
-----Original Message-----
From: James Smith [mailto:JSmith@xxxxxxxxxxxxxxxxx]
Sent: Wednesday, March 01, 2000 7:13 PM
Subject: OIL has almost reached our upside target of 32.35--35.85
Technicians know that ascending triangles often
set up nasty corrections. What I find intriguing is
that both Nymex Crude and the Nasdaq show this
formation...& both violated the upper line, which
often occurs just before a fall. Crude hit a High of
31.77 today (Nymex March) & it may possibly test
32.35 tormorrow, but it looks as though its nearly
ready to fall off a cliff. This makes intuitive sense
because even though Richardson (DOE) says he
would "like to maintain the SPR for a crisis situation,"
what could be more important to the Administration
than winning the election???
The Nasdaq (mar) might possibly continue to
4500 or so, but also looks as though its
ready to fall off a cliff. Maybe there's a connection.
Will a surge in oil prices cause investors to
worry that 50bps is coming March 21st instead
of 25 bps, and therefore reconsider the idea
of holding onto their stocks?
At some level soon the Administration will be very
tempted to release the SPR and perhaps there is
some truth to the rumors that more oil is already on
the way. Again we cannot rule out a move to 35.85
basis Nymex March contract, but a sharp Wave II
correction for OIL would fit nicely with one last move
down for GOLD and quite possibly a FreeFall for the
Nasdaq.
Where do I admit I'm wrong:
Nasdaq (mar) breaks above 4800; DOW and S&P
make New Highs. This would set up a mega-blowoff high
into April followed by a May Crash, but a strong correction
in the Nasdaq in March still seems much more likely.
Panic Cycle indicated on Nasdaq for month of March:
The problem with Panic Cycles is that they don't
tell you which way the market will move. All they tell
you is that you are going to experience wild vol in
the market indicated. Still, given the overbought
nature of the Nasdaq, the risk is that this month's
Panic Cycle for the Nasdaq will turn out to be Panic
selling rather than panic buying. Keep an open
mind. Let the mkt tell you what its going to do.
Watch for a break below 4000 (March contract) or
a break above 4800 (March).
Is the Yield Curve getting ready to steepen sharply?
The mkt is discounting 2 more rate hikes and many
analysts believe 3 or 4 are coming. These analysts
may be proven wrong if stocks sell off too sharply
in to short a period of time.
Is this a setup for a "curve steepening" trade?
If the Nasdaq sells off sharply here in March, a rate hike on
March 21st of 25bps may be the last hike for a while.
It all depends on how precipitous the slide is for the
Nasdaq. Greenspan would no doubt appreciate a 20-30%
correction in stocks, but may grow alarmed if it goes much
beyond that. Arbs that have put on curve flattening trades
would be thrown for a loop.
Event risk is growing.
Arbs do not care whether the trigger is a JGB slide,
invasion of Taiwan, an oil spike, or just a a plain-vanilla
stock mkt selloff from overbought levels. What matters
more to arbs than the event itself, is the effect it has on
the yield curve.
If Greenspan chooses NOT to raise rates or it becomes
apparent that he may only raise them once for 25bps
rather than 2 or 3 more times, it turns the world upside
down for Arbs. 2yrs would rally as traders take
back some already discounted rate hikes...and bonds
might sell off if traders believe this is going to be
a 1987 style correction--that is, one in which the stock
mkt tumbles but the economy plows ahead unfettered.
A stk mkt selloff not accompanied by a slowdown in the
economy would make life very awkward at the FED.
If the Nasdaq is off 30% or more, but the economy
continues to show signs of unsustainable growth,
what would the FED do?
Since many people are in stocks for the longterm, they
may not care that their stocks have sold off. 401K
programs are automatic.
The FED: "Damned if you do, damned if you don't."
Some market commentators will no doubt worry
that the FED will continue to raise rates regardless
of severity of the selloff in stocks. This perception
could add to the stock mkt's decline.
Other analysts may worry that the FED will not
raise rates enough (in an election year) to
be able to slow down the economy given the
amount of cash that keeps flowing into stocks
from 401 K programs and overseas buyers
(Many Europeans missed the boat and would
only be too eager to buy a major dip in US
stocks).
The perception that the FED is incapable of
slowing down the economy may have
devastating consequences for the 30 year
bond.
In this context I believe Friday's Unemployment
figures may actually trigger an event. If
unemployement comes in at less than 4%,
look out! A tight labor market is going to
be a major concern to the FED and traders
won't wait til March 21st to see what the
FED decides to do.
"Chaos and Mayhem"
A lot of people are likely to grow very very
confused. When confusion reigns people
are more apt to buy the 2yr than the 30 yr.
A precipitous steepening of the Yield Curve
is coming.
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