That is, the forex market in this case absorbs the valuation inconsistency in a) a rising market and b) a well founded rising market and c) a non well founded rising market. That in, in some cases, rising equity markets are not consistent valuation processes. One could go further and say that in general they will eventually prove their inconsistency with a massive retracement.
That is the more consistent they are the bigger the fall. That is a general feature of markets, they are not geared for consistency, given the fact they are designed to strip away bargains, which is precisely what participants are looking for, or trying to create.
So is it possible to disprove this inconsistency, to stabilize markets this way. In theory, one could use a market which more closely mirrors the equity market such as the commodity market to absorb some inconsistency. This tend to be what happens before a crash. That is the commodity market works to prolog the bull market, and indeed one may see at this stage the final peak. This suggest it may be unwise to stabilize prices in commodity markets too much.
However they may have this role, precisely because their pricing is so grounded in external inputs, namely demand for wheat, for example, the weather and economic growth causing demand. That is there is not much that can be controlled from the market.
The forex market I might suggest will not absorb valuation inconsistency. What it may do is prove this inconsistency. Essentially these pricings are not optimal with reference to the wider economy forex is constantly made consistent with by traders.
However there is no way to fix the forex market. There is no reference of valuation to inflate. However it may be argued that reducing leverage may have the effect of allowing asset inflation in the forex market.
Is pricing of silver and gold asset inflation. I would suggest not. It is more like a free pricing, which retraces hard and fast with no predictability. Random re-pricing removes inflation as a pricing attribute.
In this case retracement is like spinning a wheel to find a new pricing. There is sufficient structure within commodity pricing for example that its repricing is not a random pricing event.
The fact the forex market cannot be structured in such a way as its pricings conform to desired outcomes is entirely why it functions during massive asset retracements. This makes it hard to trade, but first and foremost it is a market for valuing foreign exchange transactions, with traders along for the ride, given how hard it is to force valuations.
This means it is the interconnection between the valuations of economies themselves. It is hard to see how this could be structured except in some kind of world economy (the internal needs of the countries can add random inputs). However one might expect the retracement from this price fixing to be massive. And indeed it was, there was a quasi-world economy in existence before the crisis.
So how could one have a world economy with sound asset valuations. Well, would one want this, it is a bit like wanting one stock. One might expect that such a world economy might not recover from a retracement for a very long time. There would be no way of referencing valuation.
That is valuation is inherently inconsistent, especially when it references future valuations. That is a bull market: highly inconsistent valuation, but consistently referenced. The forex market may absorb inconsistency in reference, if it has optimization properties. A bear market is simply non-referenced valuation, at some stage seeking it, and then finding it and then moving towards future projections then collapsing down to present valuations.
Is a bear market consistent. It gets consistent at bottoms and at the point where it begins to rise again, it seems like a forex market after a session closes, it seems quite precise. But what about the valuations between.
Well, that is the issue with bull markets, these seem to lack a way to value them, simply because there is no stable differential to value, that is the valuations between may not reference the valuations at the bottom and from the point of the fall.
This is why it is so hard to pick that bottom, most likely you will find a range that is not referencing anything but itself, given that the timing of the rise is random. In forex patterns and range do tend to reference past data, but the reference itself may be a random occurrence.
However the internal structure of that reference, those patterns I have looked at on my other pages, may have an order such that one can get a bias of some kind for the reappearance of that reference. This may not help in equities, as the reference may have an order from what the forex market is doing, that is it may be a functional component of the market.
This suggests those pairs which do not have such clarity are functionally different and it raises the question of whether a bear market is or is not functionally an equity market, it may be that which re-creates such a market. This raises the question of whether there is information passed through each cycle, and thus whether the market gets more efficient at re-creating the bull market.
Bear in mind it may get less efficient, however one can see external structuring, like technology, programs, at work which may bias it towards at least a direction of increased efficiency, if information is passed. This may make it harder to detect whether a new bull market is beginning, unless one could factor in that change. That may be a factor of increased efficiency of company formation.
© 2011 Guy Barry - All Rights Reserved.
