Ok, I couldn't help myself -- I'm back. My name is brooklynguy and I am a forum addict...
I don't believe 2 sides can actually debate the merits of an argument unless they can agree on what they are arguing about. That's the genius of Talmudic thinking. (I imagine you engage in this sort of thinking every day in your day job.)
And the importance of Sol's original argument is that he is the one who made the original claim. So that is what we should have been arguing about, until we chose to move on to a new point of disagreement.
Fair enough. I thought we had already established that you and I, at least, were arguing about different things, because we interpreted sol's original claim differently. Rebs and frugalnacho seem to have understood "our side" of the debate in the same way I did. If sol decides to reengage and shed light on his understanding of his own argument, then we'll get more insight into whether or not he did too. But now that we recognize that we in fact did not agree on what we were arguing about, shouldn't we move on to argue over the point of disagreement about which we (hopefully) do agree that we indeed disagree?
Every trade including buy and hold amplifies some gyrations and diminishes others depending on the time period that you look at. In this sense every trade both increases and decreases volatility. To make a claim that one strategy increases volatility over another you really have to specify a time frame.
Yes, I agree -- this was exactly my point.
I will agree that in your graph md2 stock is more volatile than Brooklyn stock. But I would simply point out that this use of "volatile" is a very different usage of the word "volatile" from when someone says "of late there has been increased market volatility." Volatility used in this manner is used to denote unusually rapid high amplitude price movements.
Do a google search for "increased market volatility" and you will find that the articles that come are about rapid high amplitude price movements that are readily apparent to market participants in real time. You will also find that these articles pop up at times of market tumult as is September 2015.
It's a different usage only in the time period in question, right? If "of late" means "in the last few days," then it's referring to market gyrations over the space of the last few days. If "of late" means "the last few months," then it's referring to market gyrations over the space of the last few months.
Again, it's no different than usage of the phrase "of late the market has trended up." If "of late" means the last few days, it's referring to an upward trend over the last few days. If "of late" means the last few months, it's referring to an upward trend over the last few months.
I definitely agree with you that when people generically refer to market volatility (without specifying the precise time period to which they are referring), they are more likely to be referring to time frames on the shorter end of the spectrum. Price swings over the space of a day or a week or a month get much more attention in the financial press and at cocktail parties than price swings occurring over longer periods . But I do not agree that price swings occurring over the course of a year or even several years cannot be, and never are, described as market volatility.
Importantly, in Sol's claim that DM increased volatility and market instability he was almost assuredly using "volatility" in this second meaning of the word, based on his own words and context.
Is the "second meaning" what I just described above? The same as the first meaning, except as to the relevant time span? Market swings occurring over periods short enough to qualify for some unspecified cutoff, but not market swings occurring over longer periods?
My reading of sol's original claim, and all of his subsequent posts except for the one you cited above (post # 896, which I am confused by), is that the "volatility" he was referring to is the same "volatility" that actually gets amplified by momentum trading--namely, the market gyrations that occur over whatever lookback period the momentum traders are using. That is was he repeatedly claimed, isn't it? That piling on to every price swing magnifies the amplitude of those price swings?
If that is not what sol intended to claim, so be it, but that is what I am claiming and have been claiming.
If you like, please make the argument for why you feel that DM is more likely to lead to "volatility" in this second definition of the word.
If I'm understanding you correctly, here you mean the argument that momentum trading using a lookback period in the 3-12 month range contributes to volatility over shorter periods (days? weeks?) (that is, the argument I understand that you think/thought sol was making, and that you previously thought I was making). I would not make that argument, because I don't think it is true. I think momentum trading contributes to volatility over periods containing subperiods equal to the relevant lookback period, not shorter periods.
Importantly what you have not demonstrated, is that the DM strategy increases the likelihood that the stock market will behave more like my stock and less like yours.
That's a different argument, but one that I am also happy to engage in.
If the time period covered by the chart above is long enough to include multiple lookback periods, then momentum trading necessarily causes the market to behave more like your stock than my stock because (as I think we all agree) momentum trading has the self-reinforcing effect of amplifying the price trends it trades on. Momentum traders will pile on to every price swing occurring over the lookback periods contained within the overall time period covered by the chart and thereby amplify those price swings. Let's suppose the chart covers a two year period, and we're talking about momentum traders who use a three-month lookback. At the end of three months, if the market has trended up, those traders will pile on (by purchasing shares) and thereby push the market further up. Over the next three months, if the market has trended down, they will pile on (by selling shares) and thereby push the market further down.
Now, as I believe everyone on all sides of this debate has explicitly recognized, this effect requires sufficient presence of momentum trading in the market in order to be meaningful and it can be counteracted by other forces in the market. But the greater the share of the market that momentum traders make up, the stronger the gyration-amplification effect will be, and the less susceptible it will be to counteraction by other market participants.