Principles of Market Price Movements

This is true even in extreme cases like Enron. If you look at the two year chart leading up to their collapse, you'll see that the stock did not drop to zero overnight. The decline actually took quite a number of months. If a person had any sort of exit strategy at all, they could have sold their Enron shares near the beginning of the slide and minimized the financial damage.

Markets Have Memory

For those who are prepared to delve deeply into the subject, the Lyapunov Exponent is one way to distinguish the difference between a series of discrete random events and series where past events influence the present movements. Calculation of the exponent for U.S. markets[5] shows that past events clearly effect current events. The effect is strong at first and then it fades over time, becoming negligible after about 42 months.

In addition, the Hurst Exponent shows that "the stock market is not a random walk, but rather is a fractal with trend-reinforcing behavior."[6] However, these complex calculations simply confirm what common sense tells us. Markets are people; therefore, markets have memory.

A Market is a System of Excesses

A market is a system which constantly searches for equilibrium, but never quite manages to achieve it. It almost never comes to rest at the equilibrium point, the “fair market value”, because it is always being pushed one way or another by forces which are a varying mixture of three elements - analysis, guesswork, and emotion.

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