Long Chaos

Tuesday, January 04, 2005 | 04:35 PM

A friend writes:

The QQQQ have had a 4% drop from the previous day's high 259 times in the last five years. The next day, 142 were up, and the average was up by .3%. And if they were down 4 days in a row with the fourth down big -- 15 out of 24 were up for an average of .9%.

I find these analyses to be somewhat problematic. One of the problems with this sort of quantitative analysis is the issue of single versus multiple variables.

It's tempting to find correlations when reviewing these numbers and assume a causative relationship. However, the complex systems (such as the stock market) tend to have many more variables at work simultaneously. One would have to control for many more variables to have a high degree of conifdence in the correlation of these stats.

A 4% drop in the Qs is but one factor; I would want to add a few additional data points: In addition, I would control the 4% "drop" for market performance over the prior 90 days, the advance/decline line, 52 week hi/los, and a variety of sentiment factors.

The nature of complex, nonlinear systems, sensitive to initial conditions is that single variables rarely provide much insight.

That's why I am always long chaos . . .

Tuesday, January 04, 2005 | 04:35 PM | Permalink | Comments (0) | TrackBack (0)
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