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22-Jun-2006
Hysteresis, from Victor Niederhoffer

Hysteresis: Sir James Alfred Ewing has given the name of Hysteresis to the subject of the lag of magnetic effects behind their causes. He has shown that under constant magnetizing force the magnetism will go on slowly and slightly increasing for a long time: this is called magnetic creeping or viscous hysteresis. "There is a good deal of hysteresis, that is a time lag between the cooling and the setting to be expected of the jelly." A simple electronic circuit that displays hysteresis is the Schmitt trigger.

A hysteresis loop, a graph showing how the value of some property of a hysteretic system varies as the agent causing it is varied from one value to another and back again, having the form of a closed curve. -- OED (A good graph for all market people to have handy at all times.)

II first came across the concept of hysteresis when I did something very good or very bad as a little boy and it took a long time for the consequences of that behavior to eventually manifest itself in the result. I next got some physical manifestation of it when I spent many years as an electronics hobbyist constructing all sorts of op amp circuits that had triggers and buffers that led to a delayed but inevitable reaction of the output dampened by negative feedback from the input. The enclosed link to Schmitt triggers is one that I found particular pleasure with and helped me and my friend, Leon Foreman, on the road to designing an automatic toilet lid opener.

Indeed, hysteresis is one of those universal concepts that comes up in all aspects of psychic, physical and market life. The most vivid times I came across it in markets are the delayed but inevitable reactions of markets to movements in interest rates. It used to be that the stock market and the bond market almost invariably went in the same direction during the year. This relation trumped all others, including the good earnings good stock market relation (which doesn't exist) and helped explain and predict many a market movement. Indeed, the work of Tom Downing and the Spec Duo on the Fed Model is an excellent example of a modern update of that work. It's one of the reasons that, even more than usual, the triumphalists have the wind at their back these days, although the extreme negativity of stock market sentiment, at a 30-month low, and the hoped for Dow 5000 of all those who hate enterprise is another highly bullish factor, (this latter always engendered for the next 10 years after a market crash as we had in 2000-2002).

TThe hysteresical effect of the interest rates on stock markets is a bit more subtle now. It was all changed by the 1987 crash when stocks went down 30% or so in two days and interest rates dropped by a comparable amount. Since that time, the reaction has been much more convoluted and delayed. And the movement of bonds yields in mid May to above 5.0 % from 4.7 %, in conjunction with the gold and energy moves up was the Schmitt trigger that led to the delayed reaction of the 10% stock market decline.

All that is a given. But I would like to focus more on another aspect of the hysteresical effect. That is the movement of the Arab markets which was a concurrent circuit that helped to trigger the whole hysteresical effect. It started in Feb with such things as the Saudi Arabian market above 20000 in Feb month end up steadily over the previous six years from 3000. It fell to below 10000 on May 13, 2006. That was the trigger, along with the interest rates for the effects that followed with accompanying accidentals relating to the CPI, the changing of guard at the Fed, and the unfortunate dinner meeting which sparked the need to gain credibility. Since that time, every market in the world has had a mini crash ranging from 10% to 25% Japan moves down from 17000ish in mid May to 14200 on June 13. The Dax moved down from 6143 on May 13 to 5294 on June 14. Since that time, things have become normalized. The hysteresical effect is in reverse. The Sasftdx has moves up steadily from 1000 to 12729. The Nikkei has moved above 15000 to 15135. The Dow from 10700 on June 13 to 11100 at today's open. The Dax is pushing 6000 again.

Date Dax Nikkei SP Saudi Date Dax Nikkei SP Saudi
28-Apr 6,009 16,906 1,326 13,043 26-May 5,788 15,970 1,293 10,385
1-May 6,009 16,925 1,318 13,417 29-May 5,755 15,915 1,293 10,519
2-May 6,051 17,153 1,328 13,000 30-May 5,622 15,859 1,270 10,832
3-May 5,968 17,153 1,323 13,053 31-May 5,692 15,467 1,282 11,201
4-May 6,039 17,153 1,327 12,751 1-Jun 5,707 15,503 1,296 11,610
5-May 6,113 17,153 1,339 12,751 2-Jun 5,687 15,789 1,298 11,610
8-May 6,127 17,291 1,337 11,376 5-Jun 5,621 15,668 1,280 12,181
9-May 6,140 17,190 1,340 10,598 6-Jun 5,502 15,384 1,276 12,423
10-May 6,118 16,951 1,338 10,074 7-Jun 5,543 15,096 1,266 11,408
11-May 6,054 16,862 1,322 10,046 8-Jun 5,383 14,633 1,266 11,994
12-May 5,916 16,601 1,305 10,046 9-Jun 5,464 14,750 1,261 11,994
15-May 5,857 16,486 1,307 11,859 12-Jun 5,395 14,833 1,246 12,078
16-May 5,851 16,158 1,305 10,764 13-Jun 5,292 14,218 1,232 11,936
17-May 5,652 16,307 1,279 10,692 14-Jun 5,305 14,309 1,241 12,046
18-May 5,666 16,087 1,273 11,046 15-Jun 5,422 14,879 1,267 12,046
19-May 5,672 16,155 1,281 11,046 16-Jun 5,376 14,879 1,260 12,046
22-May 5,546 15,857 1,272 10,147 19-Jun 5,439 14,860 1,248 12,610
23-May 5,678 15,599 1,263 10,367 20-Jun 5,493 14,648 1,252 12,633
24-May 5,587 15,907 1,271 10,341 21-Jun 5,503 14,644 1,261 12,729
25-May 5,706 15,693 1,286 10,385

The hysteresical effects are almost as inevitable as the circuits I played with with my op amps and I recommend going to your local electronics store, and buying a couple of 8-volt batteries, a good op amp or two, some resistors and a capacitor or two for a good hands on ( Montessori like ) rendition of what's happening today as first Europe goes up, then Asia stumbles, then the US fails, then Asia goes up, then Europe goes up, then finally the hysteresical effect of a nice rise in the US inevitably follows.

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