Changing Lanes

When navigating the chaos highway, what you quickly realize is that, while the middle of the road can't give you a clear sense of direction, the edges of the asphalt are usually so cut-and-dried that you find yourself neglecting to even imagine what it's like beyond the edge. This can never be made more clear than if you ride a motorcycle. Sure, you have ten feet of margin on either side, so in a way it's like you have all the freedom in the world, but that stops at the curb. If you ever have to get closer than you like, you feel it fast.

The boundaries of the stock market are not hard boundaries. Think of grassy medians. The stock tends to bounce around like a reckless motorcyclist as long as things are more than okay. Wanting to profit from the movements of this motorcyclist, we're tempted to try and hire physicists and mathematicians and work out the equations of motion etc etc. Yet because of the motorcyclists unpredictable whims and even bad driving decisions, this is for the most part guaranteed to be a dead end. The more precisely we try to describe the motorcyclist, the more vulnerable our predictions are to subtle inconsistencies.

But recall the cigarette analogy. We know that the largest divergences are the most rare. We know that the range of expected behavior roughly reflects changes in fundamentals and subsequent shifts in price-elasticity (supply-demand/price relationship). What if the motorcyclist is happily speeding along in the far right lane on a freeway that's taking a sharp left and dropping two lands due to construction. Chaos goes here. If "here" changes because the highway itself is turning too far away for the motorcyclist to do whatever he or she wants, then it's no longer about their whims. With a limited degree of certainty (they can ride in the median if they're crazy) they will follow the road.

The trading price is like a reckless motorcyclist. There's lots of profits and losses to be had in the chaotic meanderings through five lanes of traffic. The reliable profit comes when you see that the motorcyclist has nowhere else to turn. Keep your eye on the biker, but keep a better eye on the road. As a corporation's fundamentals change over time, the region where the stock will trade at also changes over time. The stock price is the most obvious piece of the picture. When you see that the fundamentals that have created the current trading regime are going to break down in some way, good or bad, you know almost without a doubt that the stock is about to be on the move.

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