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There are some people in any modern day society that when they speak, it’s a good idea to listen to them. One of them is the former Federal Reserve chairman Alan Greenspan. He is not only one of the few people in the world to be able to work in an environment to understand how all the macro world events affect economies, but he also understands how to apply the statistical data to provide evidence for his findings, the hardest of all skill traits to acquire. His knowledge and ability to use the mega-data from government and other sources is legendary. I think his most important trait is his ability to take all the complicated analysis and deliver it in a way that anyone can understand. In some ways, his approach of making it easy to understand undermines his accomplishments and makes him a target if his predictions do not fully become accountable. In either scenario, he is someone that understands the data, and when he is providing analysis of that data, we should listen.
Alan Greenspan’s latest review of the stock market is that the overall movement is being influenced by fear and predisposed inertia. In his analysis, the daily changes in the S&P 500 from 1951 to 2013 resulted in daily price changes of +/- 0.7% for 67% of the time. The normal distribution of this statistical population would indicate a price change like this about 53% of the time. This indicates higher variation, i.e. movement. Another statistical fact is that the daily losses of 5% or more outnumber and are statistically significant than gains of 5% or more. This indicates the “fear” factor in the market.
The herding effect, or following the crowd, is noted during times of bubbles. This was indicated in his analysis from 2008 to 2013. Bringing decision making toward reality eliminates the effect of fear and herding, driving out bubbles and imbalances. As noted by the dot-com bubble, only those affected were highly leveraged. The recession following the dot-com boom was barely visible in the GDP data.
The former chairperson has statistically indicated that arbitrage profits can be gained in this market due to the fear spread difference in the normal distribution from the normal 53% of the time to our current rate of 67% of the time for gains and losses of 0.7%. As a stock picker, look for stocks that are excessively receiving upward or downward pricing pressure – that is the indication of this fear factor. Once identified, execution of a stock strategy can be determined to gain profits. Happy hunting!!
Gary Kapanowski – Lean Six Sigma Master Black Belt – Excelsior
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