August 03, 2004

• This was posted a while back on MetaFilter, and I almost paid Matthowie to join the Blue just so I could discuss and debunk this. For purposes of disclosure, I am a professional options trader, and a member of the American Stock Exchange. First off, that chart midway down about the S&P/VIX ratio is entirely misleading. The VIX, or volatility index, naturally declines as stock prices rise. By definition. So, of course, whenever the ratio is high, that means stock prices are high and thus likely to decline. Second, I know very few traders who can mention the phrase "Fibonacci cycle" or "Elliott wave" without snickering. The notion that there is a cyclical pattern to the market is very valid, but the belief that it conforms to a specific, repetetive mathematical sequence is laughable. If that were true, Elliott would have been a billionaire, rather than a relatively unsuccessful trader who primarily subsisted on pamphlet sales. I'm not even going to get into the fact that the Fed doesn't "control" the M3 money supply. It can exert significant influence over it, but things like currency transactions, bond market fluctuations, and the general state of the economy are also major factors. Finally, if the Fed is pumping liquidity like there is no tomorrow, they surely WILL NOT raise short-term interest rates when they meet the end of June. Oops. All that being said, the economic outlook for the US isn't really that great. I'd be much more concerned by the potential for a Japan-esque stagnation, plus the dangerously high real estate prices coupled with extraordinarily high levels of consumer debt - credit cards, mortgages, car loans, etc. I'm not worried about a crash; I think a significant period of stagnation would be far worse for our economy.

• I am a professional options trader

  This is entirely offtopic, but as a software developer and systems administrator who's been working on projects that don't do anything tangible, I occasionally sit back and marvel at how specialisation has moved from "I knap flints better than anyone, so the tribe feeds me so I can concetrate on making spearheads, rather than go hunting" to, "I am a professional options trader."
• (And, I should add, this is not intended as a value judgement on you or your job, jaypro. Just a general sense of wonder. And thanks for the informaed analysis.)
• *also wishes to thank jaypro*
• /flagpole adjusts tinfoil hat, meekly raises hand in the air... Erm, Mr. Jaypro, can you give an opinion on just what came out of all that airline stock business during that fateful day in september, 2001? Has there been some investigation, some result, some report that hasn't been known by the general public? Or 'they just were OBL's associates', and that's all there's to it?
• Yes, we just want to be friends with Bashi, He's the guy who controls the gas and oil Lying underneath the Turkmen soil! Yes, dearest friends with Bashi, we! He lets us haul precious oil away -- So we press our governments without delay To look the other way whenever trouble brews And keep word of Bashi's nasty edicts out of the news! We ignore the lack of human rights and social dignity, So our governments say to hell with human decency! For everyone means to be friends with Bashi, Good friends, yes, and ever so true To profit and loss if not the human cost -- Because you see we love him, yes we do, Not for what he is but for the gas and oil biz He can bring to me, our country, and you!
• Pox! Apologies! I just posted where I didn't intend this to be, but wotthehell, it's done and better here than in some even less related thread. *sigh*
• we love you bees!
• Flagpole - I wish I knew more about the investigation into the airline stocks pre-9/11. It's my understanding that there was some extremely heavy volume in the airline stock options during the early days of September. Apparently, the accounts that purchased these options were abandoned, and to the best of my knowledge nothing has come of the investigation. I can tell you that all traders are now required to report "suspicious trading activity," although what that exactly entails remains vague.
• bees, I can't tell you how many times i've thought about intentionally doing that. Ha! a new high!
• Not that I understand economics well, but if a market crash is foreseen, wouldn't people be putting money into shorting the stocks, and thus stave it off? Or does a crash require a runup of boundless optimism by all the traders?
• The mechanics of a crash are complicated. Generally, though, the cause involves something called stop orders. A person who owns stock may put in a stop sell order, meaning that if the stock declines to a given level, their broker is authorized to sell the stock at ANY price. When stops are triggered for large orders, a flood of selling can hit the market. This in turn could trigger more stops, and thus create a waterfall of selling that can push the market to extreme lows. Fortunately, since 1987 there have been rules implemented that literally shut down the markets after a move of a certain percentage. In theory, this will allow the markets to calm down and regroup, and thus prevent a true crash.
• I can tell you that all traders are now required to report "suspicious trading activity," although what that exactly entails remains vague. So we thank the terrorists for jailing Martha Stewart?
• As of March 23, 2006, information regarding M3 will no longer be published by the Federal Reserve. so thats cool