Market Analysis - Is it science?

[WaxyChicken]

First time posting so apologies if this question is in the wrong section.

I've recently gotten into the cryptocurrency market and so I've spent a lot of time online studying market analysis. When i got started i though it was the study of how stable a business or commodity is, outlook on productions, etc...  instead I find that "Market Analysis" is the study of previous market movements to determine future market movements.

some examples can be found here: https://optionalpha.com/13-stock-chart-patterns-that-you-cant-afford-to-forget-10585.html

I've studied this hard and deep and then came to a sudden realization -
This seems an awful lot like horoscopes.

Let me give you an example:

A rumor starts that Quick-E-Mart's CEO will be stepping down.
QEM's stock drops 5% due to uncertainty of who the next CEO is.
Then it's revealed the rumor is false and in fact the CEO is just going to japan to close a deal on a big expansion.
QEM's stock responds by jumping 10%.

With Market Analysis the theory appears to be that the 5% drop and 10% jump could of been predicted because two weeks ago the market chart made a funny M shape, or bounced off an Elliott wave, matched a trend line, or proved a Fibonacci sequence, etc... and "Oh, we over-looked see this line dip in the chart over there so that's why it jumped 10% when we weren't expecting it to."

This sounds totally preposterous to me once i began to think about it and i have to ask:

has anyone ever actually scientifically tested this whole Market Analysis / Chart Analysis field?
These Market Analysts make from $33k to $121k a year getting paid to place other people's money on the market.
It appears to be a recognized field of study with degrees at major universities.

but does it hold scientific H2O?

Thank you for any information on actual research done to test scientific validity of this field.

PS:
i suppose it COULD work if everyone charted the same way. 
EG: if all market analysts expected the price to drop 5% then they'd take steps which would create a self-fulfilling prophecy. 

But it's subjective enough that you will easily find recognized professionals saying different things at the same time on the news channels about what to expect from the DOW or NASDAQ because they all appear to interpret the Rorschach / Chart pattern differently.

Edited April 26, 2018 by WaxyChicken

[Prometheus]

16 minutes ago, WaxyChicken said:

instead I find that "Market Analysis" is the study of previous market movements to determine future market movements

I guess you must be using some kind of time series analysis, an ARIMA model perhaps, which assumes past information is sufficient to predict the future. This can work if the assumption is reasonable - if you are running an airline company and have observed a seasonality in the data (i.e. more people fly in summer), that can be usefully modelled. But this simple model can't take into account events like shooting down a plane (unless it happens regularly) which shocks the market.

A better model might be something like the Black-Scholes equation which models market ups and downs as a Brownian motion (i think it makes the assumption that time is independent). As i understand it the important parameter is the variance (or market volatility) as it makes the likely range of predictions (under monte carlo simulations) broader. I'm not sure how useful it is in practice though, people in the business must already know more unpredictability means more risk. Horoscopes might work just as well for these decisions, i wouldn't call it a science.

Interestingly, i came across a particular MSc course called Financial Engineering which costs £20,000,  which with the selection of certain modules was identical to an Applied Statistics MSc which cost £8,000. People were willing to pay just for the name of the MSc.

[Strange]

41 minutes ago, WaxyChicken said:

This seems an awful lot like horoscopes.

Yep.

As investors like to say (or are forced to say by regulators) "past performance is not a guide to future performance."

Similarly, most explanations for market movements are post-hoc justifications based on trying to find something (anything!) in the news that could correlate with the changes.

There are exceptions where there are real justifications for a change: a company launches a new product that is expected to be successful; a restaurant chain has dozens of cases of food poisoning; a national bank announces interest rate rises; etc. 

[WaxyChicken]

I'm incredibly dismayed that this tea-leaf reading practice is taught at major universities that are otherwise quite credible.

it's even taught at Cambridge university: https://www.mrao.cam.ac.uk/~mph/Technical_Analysis.pdf

This is giving credit to fortune telling,  not science.

Yes, i agree with you, Prometheus, such definable time-period influences are valid (ergo: the christmas shopping season and toys, winter and salt sales for the roads)
however the teaching is that price and volume strictly from the chart tells you all that you need to know.

i find it highly suspect that 702,454 people sold their stocks in July just because 909,134 people bought stocks in January.
yet this is taught at every major university and business school. 

disconcerting.

Spoiler

 

[Prometheus]

1 hour ago, WaxyChicken said:

This is giving credit to fortune telling,  not science.

If the maths is thorough i've no problem with it being taught for credit, but any model stands or falls on how well it holds up to the assumptions it makes: i think this is where financial modelling falls. 

It's future might be brighter though: you could think of financial modelling as just an application of quantitative social science. Now we have data sets kindly provided by Facebook and co to anyone an their mother, and with developing machine learning techniques, we are starting to see rigorous mathematical applications in social sciences.

[John Cuthber]

I understand that  it was Ezra Solomon who first said that the purpose of economic forecasting is to make astrology look respectable.

 

https://www.ft.com/content/abd15744-9793-11e2-b7ef-00144feabdc0

[WaxyChicken]

40 minutes ago, John Cuthber said:

I understand that  it was Ezra Solomon who first said that the purpose of economic forecasting is to make astrology look respectable.

 

https://www.ft.com/content/abd15744-9793-11e2-b7ef-00144feabdc0

the above link without the pay-wall: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjJ1Z_JztjaAhXEm-AKHVuwCGsQFggoMAA&url=https%3A%2F%2Fwww.ft.com%2Fcontent%2Fabd15744-9793-11e2-b7ef-00144feabdc0&usg=AOvVaw0Ga6AnciIZXA4gDwG6Fl7F

 

 

5 hours ago, Prometheus said:

If the maths is thorough i've no problem with it being taught for credit, but any model stands or falls on how well it holds up to the assumptions it makes: i think this is where financial modelling falls.

Don't forget though, it's not math. it's more like pattern recognition.
very abstract pattern recognition.

for example, an "M-Wave" shape only appears to be an M if you ignore all the jittery bump and dips.  But at some point someone will say "That's too bumpy to be an M-Wave" while others will still think it's an M-Wave.

it is so open to interpretation that this is why i used the reference to Rorschach above.

 

in the sample posted below, is that an Elloitt wave? or does it not follow closely enough?

Spoiler

 

because there is no real math behind the "What does this look like to you?" question, one can go extreme and say the above image looks very much like the below image:

Spoiler

The answer to me is simple:

Spoiler

it's the Rorschach test

 

Edited April 26, 2018 by WaxyChicken

[Prometheus]

2 hours ago, WaxyChicken said:

Don't forget though, it's not math. it's more like pattern recognition.

The maths i was thinking is stuff like stochastic calculus, statistical inference and measure theory - pretty rigorous stuff. I'm not sure about the stuff in that link you provided, i haven't heard of any of it, like M-waves. From your description it does look like BS though. It may be that some places offer decent courses while others do not.

[WaxyChicken]

While the analysts will use math to determine percent of change, margin, profit, etc...
they do not use math to determine future movement and leave that up to Rorschach approach and it is used for how they place their buys and sells for the billions of dollars on the stock market.

Billions of dollars that is not theirs but instead their client's money.
Investment groups.
Pensions.
Mom and Pop's 401K's.

And this approach is taught as standard at every major university as if it were scientifically sound.
It is the approach that is used for market predictions from MSNBC to Bloomberg.

an example is : https://blog.cex.io/trading-tips/successful-trading-with-cex-io-introduction-to-simple-chart-patterns-12242

so based on what the market did the last few days you can predict if your dad will die of COPD complicated pneumonia resulting in your widowed mother selling the stocks they hold pushing the market down.  Why did this happen? Because a few days ago the market made this or that dip or curve... if you look at it just right.

it's a "Tarot-Card-Conspiracy-Theorist" style of thinking that i wish universities would not endorse.

 

 

 

Edited April 26, 2018 by WaxyChicken

[nickjoky]

Thank you for sharing useful information 😀

Research.  It’s a word with so much meaning and so much variation. The business world needs a straightforward description of the research objectives and methodology used to address those objectives. Rather than being left to interpret a statistical equation, business leaders and decision makers need a layman’s approach to interpreting the results and implications. Looking at an equation of letters and numbers is meaningless to a non-researcher. On the other hand, looking at a list of things that contribute to high rates of consumer loyalty is.

[studiot]

7 minutes ago, nickjoky said:

Looking at an equation of letters and numbers is meaningless to a non-researcher.

I think that there are plenty of applied Physicists, Engineers and Technicians that would strongly disagree with this statement.

But welcome to the discussion and SF.

[wtf]

On 4/26/2018 at 3:43 AM, WaxyChicken said:

instead I find that "Market Analysis" is the study of previous market movements to determine future market movements.

 

That's technical analysis. It's bullshit. The stock doesn't know what it did yesterday any more than a coin knows what it did in the last 50 flips.

However, it's still rational to know a little about it, because so many other players believe in it! You need to know what the chart watchers are thinking in order to make your own moves. 

It's rational to pay attention to the irrational beliefs of others. Strange but true.

[studiot]

11 hours ago, wtf said:

That's technical analysis. It's bullshit. The stock doesn't know what it did yesterday any more than a coin knows what it did in the last 50 flips.

However, it's still rational to know a little about it, because so many other players believe in it! You need to know what the chart watchers are thinking in order to make your own moves. 

It's rational to pay attention to the irrational beliefs of others. Strange but true.

Good points, I like the last line especially. +1

 

But remember also this is a resurrected thread from 2018

Edited May 16, 2022 by studiot

[Sensei]

12 hours ago, wtf said:

That's technical analysis. It's bullshit.

..not really..

..if a group of people are using the same trend analysis tools and following what they see on the screen, they are creating trends themselves..

https://en.wikipedia.org/wiki/Self-fulfilling_prophecy

...and even "worse" if they are not real people, but bots playing, predicting and following trends... you can be sure they will follow trends if they have been so programmed by the creator..

Edited May 16, 2022 by Sensei

[swansont]

13 hours ago, wtf said:

That's technical analysis. It's bullshit. The stock doesn't know what it did yesterday any more than a coin knows what it did in the last 50 flips.

But the stock market is not random in the same way a coin flip is, and what the analysis is leveraging is the response of people, not of the company. And people do research on stocks, so this is like a second-order effect of that research. Probably tied into the "efficient market hypothesis" (which is also partly bullshit)

Stocks will move up or down based on news, but they fluctuate daily/weekly in the absence of it, and I think that's where technical analysis is used. Take the concept of resistance - stocks will tend to hit a ceiling or floor in the fluctuations, because the number of buyers vs sellers depends on the price of the stock, and you run out of one or the other when you hit some limit...in the absence of new information. It's all about the reaction of the people doing the trading. Technical analysis exploits certain patterns. And it only has to work somewhat better than random guessing in order to make money.

And as Sensei points out, if you have a bunch of people doing the same analysis, you can create a trend by doing the analysis. But others may try and exploit this by using a different analysis. 

[studiot]

I agree there are patterns, but there are many more underlying reasons and complications that sensei and swansont have mentioned.
Theirs is a very simplified analysis.

The timing of sudden, and sometimes large,  changes is unpredictable and often catches out 'pattern followers'.

[swansont]

1 hour ago, studiot said:

I agree there are patterns, but there are many more underlying reasons and complications that sensei and swansont have mentioned.
Theirs is a very simplified analysis.

The timing of sudden, and sometimes large,  changes is unpredictable and often catches out 'pattern followers'.

Yes, and that doesn't really change anything. Sometimes the change is in your favor and sometimes it is not. If you are right more often than you are wrong, you still make money. The point of "technical analysis" (as I understand it) is that you don't delve into the reasons and complications. You bypass that. (One of the reasons I don't partake)

 

[studiot]

50 minutes ago, swansont said:

Yes, and that doesn't really change anything. Sometimes the change is in your favor and sometimes it is not. If you are right more often than you are wrong, you still make money. The point of "technical analysis" (as I understand it) is that you don't delve into the reasons and complications. You bypass that. (One of the reasons I don't partake)

 

I think you missed my meaning about changes and patterns.

A few years ago I noticed a daily pattern and built up quite an overall gain using your principle above.

But each day the small gain was on different shares and, as you say sometimes I lost, but on balance there was a small steady overall gain.

This pattern worked well for several years

Then one day we had an unexpected big overall drop when nearly all shares dropped and most of that gain was wiped out.

[Genady]

Here is a true story, from my memory of about 25 years ago. I worked then in Risk Dept of a big international securities company with NY headquarters in WFC, next to the Wall Street. The risk calculations kept showing that a risk of some investment that the management wanted to make, was unacceptably high. But the management wanted it really hard. So we, the financial and the system analysts of the Risk Dept, have spent hours adjusting parameters until the risk came down just below the threshold for the management to justify the deal. The deal went through. A few weeks later, the crash of 1998 happened. The company lost a lot of money. The management was fired. The analysts got big bonuses anyway.  

[Endy0816]

17 hours ago, Genady said:

Here is a true story, from my memory of about 25 years ago. I worked then in Risk Dept of a big international securities company with NY headquarters in WFC, next to the Wall Street. The risk calculations kept showing that a risk of some investment that the management wanted to make, was unacceptably high. But the management wanted it really hard. So we, the financial and the system analysts of the Risk Dept, have spent hours adjusting parameters until the risk came down just below the threshold for the management to justify the deal. The deal went through. A few weeks later, the crash of 1998 happened. The company lost a lot of money. The management was fired. The analysts got big bonuses anyway.  

Even as a kid some of that seemed crazy. Everyone and their brother kept over investing into a single area. Most websites were really not making much if anything at the time.

Really glad I shifted away from a web development focus before graduating in '02.

 

 

 

 

Edited May 17, 2022 by Endy0816

[Genady]

4 hours ago, Endy0816 said:

Even as a kid some of that seemed crazy. Everyone and their brother kept over investing into a single area. Most websites were really not making much if anything at the time.

Really glad I shifted away from a web development focus before graduating in '02.

 

 

 

 

Perhaps you refer to the dot-com bubble. That was later. When I was involved, the systems operated on client-server architecture with Excel-based clients, relational databases on servers, and SQL "magic" between them. It was fun.

The crash of 1998 IIRC was related to Russia, Brasil, Mexico, other financial markets.

[Endy0816]

4 hours ago, Genady said:

Perhaps you refer to the dot-com bubble. That was later. When I was involved, the systems operated on client-server architecture with Excel-based clients, relational databases on servers, and SQL "magic" between them. It was fun.

The crash of 1998 IIRC was related to Russia, Brasil, Mexico, other financial markets.

'Don't delve into the labyrinthine code or the magic will escape.'

Earlier crash was part of it... Investment all rushed from the more dubious Foreign Markets to Dotcoms to Housing. Was like watching a slow moving tidal wave.

[Sensei]

On 5/17/2022 at 10:18 AM, Endy0816 said:

Most websites were really not making much if anything at the time.

..the purpose of these sites was not to make a profit.. at least not for investors..

 

Before Google or Facebook made any tiny dollar, they had billions of dollars invested in their servers.. Their investors were "screwed up"..

"how to monetize our business" was after they had their listing on stock markets..

(Faceook had a long way to go to bottom in price once it was listed. -50%.. if somebody survived, is happy now)

 

Now, actually, they became piece of shit..

Not from monetary point of view, but from my point of view..

ps. I remember people asking me about whether I bought FB stocks on the primary listing.. funny., funny.. mortal beings..

Edited May 20, 2022 by Sensei

[Endy0816]

8 hours ago, Sensei said:

..the purpose of these sites was not to make a profit.. at least not for investors..

 

Before Google or Facebook made any tiny dollar, they had billions of dollars invested in their servers.. Their investors were "screwed up"..

"how to monetize our business" was after they had their listing on stock markets..

(Faceook had a long way to go to bottom in price once it was listed. -50%.. if somebody survived, is happy now)

 

Now, actually, they became piece of shit..

Not from monetary point of view, but from my point of view..

ps. I remember people asking me about whether I bought FB stocks on the primary listing.. funny., funny.. mortal beings..

 

Honestly Google and FB were always more data brokers, whatever their front business. My only gripe is that often companies often won't compensate you for the sale of your data. I'm only okay with fair value exchange.

 

In the late 90's though, many sites were acting only as digital billboards or selling low value services. People were investing without looking into profitability or even if these companies needed that much investment. While this was going on, knew a large number would be joining the industry in the next couple of years all expecting relatively high wages.