It is fair to say that the global economic system is one of the most complex systems known in the biosphere. Compared to physics, economics differs in the important fact that the basic constituents, or “particles”, are already quite complex: human beings. So macroeconomic knowledge is insufficient tool to predict market trends as not only hard data are important but also how human beings think about macroeconomic reality.
John Maynard Keynes made a famous observation that much of individual economic behavior is due to “animal spirits” rather than long-term rational calculus so beloved by economic theorists and fundamental analysts.
That’s why I don’t want here to discus macroeconomic picture (i.e most recent US job readings) because it’s rather trivial task as we are still in negative feedback process (i.e. banks continue to tighten credit standards –> less credit available means lower demand -> lower demand means higher unemployment -> higher unemployment undermines creditworthiness -> banks continue to tighten credit standards etc)
What I would like to focus here on fact that series generated by some complex systems (i.e. financial markets ) are characterized by periodic or nearly periodic behavior. In these cases, the dynamics can be characterized by scaling laws. Such dynamics are usually denoted as fractal or multifractal, depending on the question if they are characterized by one scaling exponent or by a multitude of scaling exponents. Sierpinski gasket is one fine example of fractal
Some times its necessary to conduct series of tests to find the scaling factor but in case of S&P 500 the self similar pattern is clear at the first glance.
I simply repeat the analysis which I done last year and I got very similar scaling factor 2.7. In words it may indicate that S&P 500 is around critical time and that in August we may test the March lows.
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