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10/25/2005
On Round Numbers, by Victor Niederhoffer

It is interesting to contemplate the many round numbers broken with what would seem to be inordinate frequency on almost a daily basis these days. For example, the actively traded 150 billion a day of trading volume S&P 500 futures has now broken on a daily close basis from below to above the round number on 8 separate occasions, (and now below at the open) in the last year, twice in the last week, corn price has broken below $2 a bushel, and oil flirts above and below $60 a barrel almost every day. The one thing missing from the puzzle is some stickiness or attraction of fixed income yields to a 4.5% 10 year yield ( not 4.4% ), and a Treasury bill yield of 4.0 ( now 3.95%). I started out my stock market studies at the University of Chicago by counting every time a common stock broke above 10 or 100 and calculating subsequent returns. They were enormous, but the statistical treatment of the results was confounded by the many clustering of such events in years like 1935 or the '50s ( and now the '80s) when stocks were going through the roof.

It was natural at the time to conclude that there were limit orders that clustered at the round and when these acted as barriers. When they were broken, batten the hatches if you're on the other side. But I quickly learned from study of the futures markets that these rounds tended to be broken over and over again as if an all seeing force, which I have subsequently labeled the market mistress in honor of a certain fixed income columnist (who has written an excellent book on the forces that affect fixed income that I will review soon), liked to run the stops and limit orders that slow moving members of the public place at such levels. I then changed my mantra to "a round never holds" and made some good money by following it.  But I often trade based on it, by allowing myself to take a little bit less than the round knowing that everyone else is waiting for the breakthrough to occur and a stampede will develop. This seemed to have merit also.

I was never sure whether such profits were an example of Tom Wiswell's rule, "It's better to have a system than no system, even if its a bad system."  Yes. the tendency to do the wrong thing is so ingrained that I agree with Wiswell's proverb, one of some 10,000 he authored (and which we memorialize  for our firm in the 20 years he graced our office with his weekly checker lessons.

My views on the matter have gone through another permutation. I believe that the tendency to be attracted to the round is an example of the law of universal gravitation. One market will be attracted to levels of price or another market according to the weight of the public's current or prospective inclination to provide energy to the market at these levels, and inversely to the square of the distance between them (or some such).

I now believe the situation vis a vis round numbers at a practical level resembles more the death throes of many animals as they writhe about. But it's most similar like the possum's dance, as often the seeming passivity and lack of movement to new space, is part of a deception so that it can escape when the prey's guard is open.

The movements up and down now with my favorite ratio of the running absolute deviation for a week relative to the absolute deviation for a day, running at unprecedented low levels seems to me part of such a deception now, and I am positioning myself accordingly.

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