Models behav-ing badly.

1. Emmanuel Derman has a new book out with this title, for a review click here.  He was one of the early quants- a particle physicist who switched to modeling stock prices for Goldman.  Fischer Black spent time there as well, they were two of the originators of the Black-Derman-Toy model for pricing interest rate options.  One line in the review (and book) compares Black -Scholes pricing to fruit salad- if you know the price of the fruits (the stock), you can easily price the salad! It goes in my list of books to read.

2.  You find physicists and particle physicists all over the hedge fund space- these guys understand randomness better than anyone else, so it shouldn’t surprise you to learn that they have the hubris to mess with efficient markets.

3.  Now that all the fanfare is over and many stocks have risen 50% or more from the lows of October 3 (see C, MS, JOYG, FOSL, CAT for starters) what comes next?  Widespread feeling that pullbacks will happen and that they will be buying opportunities, at least till next earnings season. Amazon continues to be a good example of optimism running rampant. Earnings are not great, the stock takes a 40 point hit after hours and is now  up 10% since.

4.  If you get more curious about  technical analysis, consider two with many adherents-  Fibonacci retracements for support and resistance  (here) and McClellan oscillators (here). For a more academic take on support and resistance, go here.