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7/23/2005
Tension and Release, by Victor Niederhoffer

You see the concept of tension and release everywhere in life: in music, literature, movies and TV, humor, yoga, massage, and s#x. Indeed, I reviewed 3.8 million Google articles on tension and release (definitely not a Googlewhack) to get a handle on it. A good general framework for it is that it's a statement of a theme, followed by a conflict with that theme, followed by a return to the theme.

It's easiest to see in the form of music with a major or minor chord, followed by a note that doesn't belong to that chord, followed by a return to the chord. This is the basis for many good schemes of composition and improvisation and in the literature it is agreed that Beethoven and Bach and Wagner, and Elvis, were the masters of this. Many references to "Rock Around the Clock" as the archetypal tension and release modern song.

One experiences tension and release most clearly when with one's significant other, and finds it in the buildup of tension that finally becomes explosive and leads to happiness. It's an experience I found most lacking during my experiences with losses in 1997 (as recounted by my detractors and would-be destroyers with great glee).

Yes, but does one experience it in markets? And is it useful and predictive? There are so many anecdotal examples that one could write a sonnet about it. The most recent was the British subway terrorist bombings which was the culmination of the buildup of tension about what would happen to the market the next time a heinous terrorist act occurred. Once the tension was released, well, the market rose a quick 7%, and worldwide wealth moved up a nice $4 trillion or so.

It also occurs when we wait for the employment number to be announced with great fears about the economy's inability to create jobs, of the kind that the sybarites and chronic bears would like to be more rampant. And it occurs as we wait for that round number, the magic 5000 in the Dow that the chronic bears look for or the magic 5000 in the Nasdaq that I look for as soon as the last bear, the last true believer in the Sageist financial columnist throws in the towel as happened in 1999 when the last short selling fund closed its doors.

But what about during the week? Is there a natural rhythm to the bars of the market with a weekly 5 quarter time. Well, one has to start somewhere, and what better way to spend a Sunday morning with the relief of a tense hypothesis vis some counting.

To be simple, I looked at the 5 daily closes in a week in the S&P futures and classified each week into 4 categories. Was Friday the highest or the lowest of the week. Or was it not an extreme. If it wasn't an extreme, I classified it into a non extreme + week or a non-extreme - week.

Thus, last week's closes: Mon. 1226, Tue. 1233, Wed. 1236, Thur. 1230, Fri. 1237. It's a high week. Friday is the high. The week ending 6-24: Mon. 1220, Tues. 1221, Wed. 1221, Thur. 1204, Fri. 1196. It's a low week with Friday the low.

If Friday weren't a high or low, then I classify it as based on the move in the week. Like the week ending 7-1 where Mon. 1196, Tues. 1206, Wed. 1203, Thur. 1196, Fri. 1200. It's a non extreme + week because Friday's close of 1200 was higher than the previous Friday's of 1196.

I looked as a start at the last year's data, a period during which the market rose from 1079 to 1237. I found that of the 50 weeks I considered 32 were extreme weeks with Friday ending at the low or high; and this seems high for randomness. After the 11 low weeks, I found an average rise of 1% the next week. After the high weeks, a rise of approx 0.4%. The 21 non-extreme weeks yielded a slight negative average.

The results look to be somewhat supportive of the idea that the release of tension is a somewhat euphoric event for markets as well as humans. Much further work would seem to be possible here, and I leave it as a market offering to the reader to do so.

I found the article by Bill Hammel on tension and release an excellent generator of hypotheses and aid to my understanding in this peregrination.

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