Gamblers of New York

I don’t see gamblers around here in New York. I wonder where behavioural finance saw them and how they coined the term ‘gambler’s fallacy’. At the Market Technicians Association Annual Symposium, it seemed business as usual. The panel was figuring out the future of markets and the future of technical analysis.
Andrew Lo, professor of Finance, MIT, said he believed technicians played a key role in the evolution of research and in pattern recognition. The future of technicals rested in a combined approach of fundamentals, technicals and quants. Andrew shared his personal journey and the resistance he faced when he was disproving the efficient market hypothesis.
He tested price volatilities for different time frequencies to prove markets were inefficient. He talked about adopting a more scientific approach to markets. Even Herbert Simon mentioned that complexity was intrinsically simple and hierarchal. Could it be possible that markets had just one DNA pattern, say a snowflake or head and shoulder, which mirrored and created every other pattern? Could such a pattern singularity in markets be probable?
The inflation vs deflation debate was won by deflationists. Both Martin Pring and Bob Prechter believed the times ahead were deflationary. Martin said if the Fed was throwing good money after a topping market with little results, it was deflationary. The new money supply was sustaining what would otherwise be a sure drop in asset prices. Bob Prechter and Craig Johnson (Piper Jaffray) were in consensus, bearish on gold, silver and oil. Though Craig looked at an inter-market boost in stocks owing to fall in commodities, Bob was outright bearish.
One could look at things a bit differently. Cash was the key element in the puzzle. For Bob, the dollar was bullish. In a deflationary scenario cash was king. And, falling commodities boost the dollar. What about the loss in purchasing power of global currencies? What society could afford to purchase a decade back, what we could afford now or in future? It seemed all inflationary. Then, there was gold. If social unrest was a reality (deflation), won’t tangible assets fare better than cash (non-tangible) assets? If sovereign default was a reality, won’t local currencies become more worthless than valuable?
From a socionomic perspective, Indian Bollywood films like Saare Jahan se Mahanga (world’s most expensive) depict a society battling with rising prices. But Bob put the debate to rest, by using the same socionomic card. He presented the Google search numbers. The society was searching more for inflation (50,000 search results) than deflation (seven search results). But did society really know about deflation? Can we really quantify social mood?
Another interesting presentation was by David Lundgren, Wellington Management. David said, “Technicals was the best story.” He talked and showcased how momentum persistently outperformed value picking. However, the momentum vs. value debate is old. Was momentum more important because it persisted more than value (in terms of time duration)? Did value not come with a lower risk and discount? And, were technical systems really incapable of identifying value? Was Debondt and Thaler’s 1981 paper showcasing that the worst 36-months losers portfolio outperforming best winners portfolio was about marrying value with momentum?
It was a power-packed two days. Larry Williams, legendary trader and market guru, summed it up beautifully by teaching the audience small bet trading. Larry reinforced that at the end of the day it was about starting slow, not losing money and staying in the game. Markets were not for gamblers but for risk managers.