share price, page-19

Ah these fundamental versus charting debates are a HC favourite aren’t they.

Just for the sake of passing some time let me take a different tack.

Its all nonsense.

(Potentially) informed investors identify the value. Uninformed investors trade on noise as if it was information. That noise is what you get on HC – a blend of both fundamental and charting posts. Some more knowledgeable, entertaining, plausible, interesting than others.

Informed investors make money through the mispricing of shares by noise traders. So the manipulation is in fact done by the “dumb” money not the smart money.

An example of an “informed investor” is a small cap fund manager. A few years ago the ASX found these guys were achieving abnormally high alpha returns. This was tracked back to informational asymmetry in the market. The fund managers (buy side analysts) had links into sell side analysts (who work for brokers) who had better information than everyone else – through contacts into the company.

Now it turns out this informational advantage is more important in the small cap sector with shares with a noisy sp where mis-pricing is easy. Doesn’t work on say BHP where all the big players have roughly the same access to all the available information. You would expect mispricing to be prominent in a stock like PRR that has a very high retail base along with the usual suspects hidden behind nominee accounts.

So it comes down to who trades with who. Divide the market into institutions, individuals and for the US- market makers. Theres quite a few studies that show when institutions sell to individuals this predicts sp falls. When institutions buy from the retail sector the sp in the future rises. When the retail sector buys and sells to each nothing is predicted.

Lets make up a completely fictional example.

The ICS data is released tomorrow. The announcement will start “PRR are pleased ...” followed by some pretty graphs showing increased activity in killer and helper T-cells. But of-course it is unclear how this will translate to PFS in either can-003 or can-004.

But the “news” should create increased liquidity for a short time.

A few types here on HC – Ymac, Kbear, Eagle , me – will attempt to discern what the fundamentals all mean. All while we have one eye on the sp.

But the only thing that is known for sure is that the market overshoots downwards and upwards. So on a big move, that is too quick suggestive of overshooting indicates that you could a do a lot worse than selling into the rise or buying into the fall. The overdone idea of trading.

Lets say the price rises. That must mean the immune activity is working. Or it means the overhang of shares is being dumped into the volume created by the “news”. Most likely (90%) the later.

On the chart we see price rising supported by volume. It jumps through a technical resistance level – the disciplined chartist waits patiently for a test to see whether resistance now becomes support – assuming it does - pulls the trigger.

Price keeps rising – looks left across the chart – finds the next resistance level – puts in a sell. Sell order is hit – another successful win.

What has happened here is nothing to do with smart money – its got to do with reading the psychology of noise traders – the dumb money. And it doesn’t matter whether the news is news or just shares being dumped.

So the chart does I think give a marginal edge in the battle between uniformed investors – the dumb money. But this is readily achieved by experience not charting. Just a selection process where if your still alive and kicking after five years say you cant help but get a better nose for things. And you can quite happily ignore both fundamental and technical nonsense.

If HC produced information rather than noise we would all be millionaires. Its crazy to think that social media somehow or other corrects for asymmetrical information in the small cap sector. A million posts of noise does not produce information.

So the success from charting comes about simply from tapping into the psychology of the uninformed investor market and to wit the attraction of HC. It also explains why for the paranoid there is undercurrent on HC that somehow the “hearts” play the rest for suckers. Funnily enough its true – but its of a trivial nature and its unconscious. Because of our delusions whether its fundamental or technical that these skills are somehow related to picking patterns in randomness – or that they are providing real informational advantage.

Now this is a most unhelpful way of seeing things. Because you end up pondering what is that makes anyone think they have some sort edge in this competitive market when we are players in a net sum game – the game of uninformed investors. I think its called paralysis by analysis.