Thursday, August 25, 2011

Surfing the Volatiles

The stock market is slowly heading down a bit today, tucking it in before the weekend. The fall of Tripoli ensures Libya's oil will once again supply Europe, and the oil stocks I'm following are down. That means cheaper gas, cheaper feedstocks, and a growing economy all may be here soon.

In audio, when you turn the volume up too high, the waveforms become clipped at the top and bottom, flattened out against the limits of the channel that conveys them. In volatile stocks as compared to blue chips, there may be a similar effect to making sound waves clip. Volatiles will rise until there's no enthusiasm to lift them further, then hold until the blue chips start to fall. On a blue chip (Dow) downward trend, volatiles will fall even faster, as the short sellers drive the adventurists out and shares are sold to meet margin calls. As the bottom nears, volatiles will fall only as fast as blue chips. They have lost their volatility, and reflect the general market.

There is not so much change at the bottom. Stock prices are nearer to book value. Changes are small and random - there is no signal - all one sees is noise.

Then an upward tick in the Dow is doubled in the volatiles. But a downward tick in the Dow is only equaled in the volatiles. The volatiles are edging upwards once again.


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