A summation of the individual volumes since March reveals an unprecedented dominance of the total market volume represented by just these five stocks (Citi, AIG, CIT, Fannie Mae and Freddie Mac), hitting nearly 2 billion shares on Friday, August 21.

Note that the hand of Government is firmly around all these financial stocks. Does that give you any confidence in a continuation of the March rally?

Source: ZeroHedge

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What does this have to do with trading? I do not know, but when I see something that may very well turn out to be a graphical representation of the Theory of Everything it gets my attention.

The graphic is the E8. E8 encapsulates the symmetries of a geometric object that is 57-dimensional and is itself 248-dimensional. Lisi says “I think our universe is this beautiful shape.”

“Understanding and classifying the representations of Lie Groups (E8) has been critical to understanding phenomena in many different areas of mathematics and science including algebra, geometry, number theory, Physics and Chemistry. This project will be valuable for future mathematicians and scientists”, said Peter Sarnak, Eugene Higgins Professor of Mathematics at Princeton University.

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When you’re caught in the middle of a bad storm, you don’t really care whether it’s a tropical depression or a full-strength hurricane. You just know you’re hanging on for dear life. The same idea applies to financial markets. When a market is trending up strongly, it’s hard to tell whether it’s just a bull market or a more dangerous financial mania.

The recent tremendous ride up for global and U.S. financial markets, including the Dow, looks and feels more like a mania than a mere bull, says Elliott Wave International analyst Peter Kendall. This distinction is important to recognize in the rising stage, because manias always result in a crash that takes them back beneath their starting point.

Kendall recently published his research into current financial manias throughout the world in SFO (Stocks, Futures and Options) magazine. The article, titled “Financial Manias and the Trade of a Lifetime,” suggests an even more stunning finish for the current manias: “The speed and global scope of the unfolding credit crisis suggest that most of the fast-rising markets of the last decade will crash in unison,” he writes.

Editor’s note: Elliott Wave International invites you to read the full five-page article with charts from the October 2007 SFO magazine by Elliott Wave International’s Pete Kendall called “Financial Manias and the Trade of a Lifetime.”

As co-editor of The Elliott Wave Financial Forecast, Kendall searches for trends that help traders to move in and out of markets. By comparing other historic manias with the impressive rise of the DJIA since the late 1970s, he focuses on the skyscraper pattern that they all have in common. The four historical manias are the Dutch Tulip mania of the 1630s, the South Sea bubble of 1720, the U.S. stock crash of 1921-1932 and the dot.com bust of the 1990s and early 2000s. Once you can see the similarities, you will be better prepared to face the music when the crash comes. As Kendall writes, “once the belief that the markets will always rise becomes widespread, it actually signals the start of a price swing that tends to be a career-breaker for any trader who tries to oppose it.”

He also discusses current manias, such as the Nikkei, which has yet to return to its start after a manic rise to its all-time high in December 1989, and the Dow, which reversed from its rise in 2000 but made a U-turn in 2002. The starting point for the Dow’s mania as shown in the chart included in the article is at the 1000 level.

Kendall, who is also writing a book about financial manias, titled The Mania Chronicles, describes five telltale signs that help an investor to tell the difference between a regular bull market and a mania. It’s a mania if:

1. There is no upside resistance, and rising prices seem to be perpetual.
2. Everyone in the market looks like an expert.
3. There is a flight from quality investments to riskier investments.
4. As financial bubbles pop in one area, they bubble up in others.
5. The crash after the peak takes back all the gains the mania made.

No. 5 can be viewed only with hindsight. But the first four signs provide essential clues to what’s shaping up in the markets.

“By studying past mania experiences, traders can gain valuable insight into the collective emotions that drive their markets,” writes Kendall. “It’s possible to make significant money in the advancing stages of a mania with no knowledge of its existence. But there is nothing like recognizing a mania for what it is in real time to help a trader keep those gains and deal with the relentless crash after it peaks.”

In the last part of the SFO article, he asks the key question, Are we at the peak yet? Find out his answer by reading the whole article for yourself.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

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One example used by Ayres is that statistical analysis of rainfall data always predicts the quality of a particular Bordeaux vintage (and its future market price) better than the most experienced human wine tasters. The image of some Budweiser-drinking good-ol-boy with a laptop outdoing the supposedly erudite blue blood glass sniffer has some appeal to me. The major point of Ayres’ thesis as I take from it is that we can all compete with the “experts” on almost anything if we do the right preparation.

A Good Magazine (online) article titled The New Nostradamus is one more twist on the data/analysis vs. judgment/intuition approach to understanding and predicting complex human group behavior. In that article, Bruce Bueno de Mesquita, a well-credentialed professor of political science, talks about his analytical approach to predicting the outcome of complex litigation and even the likelihood of wars between nations.

I recently participated in a discussion about Bruce Buneo de Mesquita with people whose opinions I generally respect and was taken aback by the general hostility to the validity of de Mesquita’s methods and by extension to him personally, although nobody in the group had ever met him. de Mesquita’s batting average on predicting the outcome of big issues is better than 90% BTW. He also has a consulting business that you can hire to answer a question for a minimum of $50,000. Actually 50K buys you exactly two answers, but you get the idea.

What do the Red Sox have to do with all this? Two things. One is that John Henry, a billionaire futures trader, bought the Red Sox before the 2003 season. It was right around the time that Moneyball was published. Moneyball is a book about how number crunching geeks who never played baseball could put together a better baseball team than baseball people who had been around the game their whole lives but who relied exclusively on their judgment and intuition. I cannot say to a certainty that anybody in the Red Sox organization even read Moneyball, but I knew who John Henry was and that he was a quant.

With baseball analytics in the air I understood immediately that the future Red Sox would not be business as usual. Interestingly, I saw exactly the same response as I observed in the de Mesquita discussion when the concept was floated in an elite Red Sox forum. That tells me that there are still huge opportunities available in any field where the “smart” individual can position against the crowd.

In late 2002 the Red Sox hired a rookie 29 year old general manager who immediately hired Bill James, the Bruce Bueno de Mesquita of baseball, and about a dozen number crunching geeks. To the Red Sox management’s credit they used their considerable analytical skills (and cash) to assemble a baseball team and then left it completely to real baseball people to run it and play the game. The rest, they say, is history.

Since I was following every move of the Red Sox in minute detail at the time I reasoned that if analytical skills could trump intuition in picking productive baseball players, then could not analytical skills also trump intuition in betting on baseball? I was also doing market research at the time, and once you realize that the “books” function is to change prices to facilitate trade in his product (the wager) and not to predict the future, betting on baseball and futures trading looked very similar. One thing that seems easier to internalize with baseball than with futures trading is that analysis is really only about 10% of the process, and that diversification and money management are everything else. Losing 4 or 5 baseball wagers out of 10 on any given day is no big deal when the pot grows. There is never an expectation of winning every wager. It seems much more difficult to accept that kind of healthy thinking while trading.

When I finished my baseball research I organized my notes into a little book. It seems that book writing is the only way I can keep my ideas from disappearing into some memory black hole. I put Betting on Baseball online so you can read it and see if you get anything out of it, about rethinking your approach to trading or even betting on baseball come Spring time. You can get even better results if you use analytical techniques (Runs Created formulae) to construct every team every day from the recent actual performance of its individual players but that is another story.

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The extract below is not one of them, but still an informative piece for getting a handle on what behavioral finance is all about.

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Nearly all decisions, conclusions and actions people make are formulated in the subconscious brain, Ervolini says. “We help managers understand whether those persistent decisions are taking them farther down the road toward good decisions, or if they lead them astray,” he said.

For investors, the seeds of personal growth are planted in the field of behavioral finance, a discipline that studies the effects of emotions on people’s investment choices. Cabot Research relies heavily on behavioral finance theory to spotlight managers’ foibles. These judgment errors include overconfidence, selling winners too early, and giving themselves too much credit.

Complete article at MarketWatch

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