CHAOS THEORY AND THE STOCK MARKET

 

Williams’ book TRADING CHAOS suggest that the market follows up and down fractals that appear to form a wave or cycle in business. Whatever happens between fractals is the

Elliot Wave theory (trading-stocks.com/fractals) This discussion is of little use to consumers and others not conversant with Chaos theory.

Therefore, in common parlance, random shocks occur in the market and give the appearance that the market is a scary, disorderly place. Thus, it is chaotic. However, over time, the market appears to have an order to it that forms waves over decades.

Some believe this originates from Fibonacci series of numbers (trading-stocks.netfirms.com/elliot-wave) of 5 distinct upside and distinct downside movements.

The eight cycles are given titles. The movements last decades.

Chatterjee (2000) hypothesizes that an orderly pendulum-like wave should be replaced with shocks. Although there appears to be a long-range order to the market, outward continuity is a misnomer and a math generated series is also inappropriate. The key is residuals or random shocks. Further, the residual is so random that trying to describe and quantify that, which causes it, appears daunting.

Holleman (2001) suggests that sociological, political, psychological as well as economic features best describe a 50-60 year cycle of punctuated equilibrium. The “great eight” stages are triggered by wars, technological innovation, monetary contraction, speculation and excess, ending with liquidation.

Meadows and Donelly (1998) observe that economic waves trigger chaotic shocks follow an outwardly appearing order that also ignites or correlates with the political climate. That a long wave is observable by computer monitored wages and production values. In the end, counter cyclic measures make the most sense in the long wave and the least sense to the political classes.

Colvin (2000) sees any kind of wave theory as folly, because practioners reify or anthropomorphize events believing that history exactly repeats itself.

Insana (2002) makes a practical case of what to do with the disorder inherent in the outwardly appearing orderly waves. History appears to repeat it self in an inexact fashion.

Investors become time-centric and an order beneath the chaotic buying suggests that consciousness is blurred and distorted by bubbles and economic mania. The main feature of the market is that “experts” begin to deny the business cycle. Non-cognitive factors blur the perception of the market. When experts and investors will no longer listen to signals of chaos and crashes, the cycle reasserts itself. THE BUSINESS CYCLE is supreme. Production nearly always lags behind consumption; excess emerges. The stock market falls. Chaos reasserts itself.

REFERENCES CITED

Chatterjee, Satyajit (2000) “From Cycles to Shocks: Progress in Business-Cycle Theory” BUSINESS REVIEW, March-April, p.27.

Colvin, Geoffrey (2000) “ The Wheelers, The Wavers and the Star Struck” October 16,

p.84.

Holleman, Joseph S. (2001) “Trading the signs of the times” FUTURES, September, p.54.

Insana, Ron (2002) TREND WATCHING, New York: Harper Books. (See also “Trend Watching” C-SPAN 2, Book TV, 12,10.02.

Meadows, Donella ; Donelly, James (1998) “The Long Wave” WHOLE EARTH, Summer, p.100

Trading-stocks.netfirms,com/elliot-wave.

Trading-stocks.netfirms.com/fractals.