Thompson is tanking. Why?

I guess that begs the question, is Thompson still overpriced on the fundamentals? I think it was hype that had in propped up in the 20s, but his candidacy may actually warrant a price of 5 on the merits. Anybody have thoughts on this?

I think I've said this before, but I really never knew what to make of the Thompson candidacy except that is was overhyped at the outset. The calender doesn't look great for him, but I'm still not totally ready to write him off. That said, I'm still to strapped for free funds to lock up what I do have by covering some of my shorts, so my words here are kind of hollow.

Everything I'm seeing screams a candidate who would really rather be fishing. I suspect if I see that his possible donors have to be well tuned into it. Still, we're close enough to primary time that I don't see him dropping out of his own doing till he at least gets to his most likely heydey in SC (after a chance at surprising in NV). And I don't see what any of the other candidates could pull to entice him to formally bail sooner. Unless Romney - in an effort to gain some of his supporters in SC say - offers some folks high up in the Thompson campaign some post-election fruits if they can talk him out of continuing his run. That's just idle imagination at work here, as Fred's voters might not flow to Mitt in numbers disproportionate enough to make the move worthwhile. It seems they'd be more likely Mitt's inheritance than Rudy's, but McCain would get a hefty share too.

Hard to call, sorry. I have no positions on him currently.

Did you ever take a position of him, or did you just watch the summer buying frenzy?

The whole phenomenon is very interesting to me, because all the problems his candidacy now faces were raised in the heady days before he announced (and even before he indicated he was going to announce) when he was trading in the high teens and the 20s. Are the markets really so short-sighted and sensitive to the way the media is currently covering particular candidates. Doesn't really seem to be the case in the McCain case, as all the comeback stories failed to really move his numbers (there's been some delayed movement as the stories petered out) or Clinton, whose numbers have risen (admittedly at the expense of Gore) in the aftermath of unfavorable coverage of the debate and driver's license fallout.

GAW838 wrote:

I guess that begs the question, is Thompson still overpriced on the fundamentals? .....

I think he's priced appropriately now, not over nor under priced. He had no idea what he was getting into. He probably thought to himself, "Well, Reagan did it, and he was no Mensa candidate. I've been a lawyer, a politician, and an actor, I was better at all of it than he was, so if he did it, so can I."

But Reagan went from acting into politics, as governor of California, honed his political skills and then had a hiatus. Like Dick Nixon, he was "tanned, rested, and ready". He was also vigorously healthy, not fighting cancer. He had also been on several country-wide speaking engagements where he knew the grueling schedule, the heckling, and thinking on your feet. Fred has had none of that, has been thrown directly into a sink-or-swim situation and will need to rely upon his learning curve to survive against veteran politicos.

Of course, all of that is on the basis that this original posted rumor does not apply to him. If that is the case, he's toast. Since there's usually no way of knowing and you have to go with the fundamentals, it might make sense to think of him with just a little bit more of a downside probability than currently shows on the face.

It looks like Thompson has finally hit bottom at 5.5, rebounding to 6.0 today.

Rate of Change, Bollinger Bandwidth, Fast Stochastic all show an inflection point, but Candlestick suggests more downward pressure if On Balance Volume means anything. Of course, these technical indicators are usually only useful after the fact...

California:

You seem to know what you're talking about with the technical indicators, care to enlighten the rest of us?

GAW838 wrote:

California:

You seem to know what you're talking about with the technical indicators, care to enlighten the rest of us?

Danger Will Robinson! I'm a straight newbie who does not know what I'm talking about.

I'm comparing past recoveries and steep slope dives, trying to come up with a strategy that says something like, "Well, if Bollinger Bandwidth is above 4, RSI is heavily positive, it's a buy, and if RSI is heavily negative it's a Sell." But I'm just beginning. I find this stuff utterly fascinating, and I would hope that a seasoned stock player could point us where to learn. I gather Tozikio came from that background.

My rolling hypothesis at this point is that with Technical Indicators + good common sense + ear-to-the-ground political sniffing, I could make money. But I'm kind of a cheapskate. I'm doing pretty well on the play market, especially if Hunter starts to follow the recent upsurge to 4% in the polls...

Did I hear someone say Duncan Hunter? (I too am waiting for even a blip to 0.2 to reward his emergence from Asteriskville.) Seriously CA, if you're a "newbie" yet rattling off those terms like you know how to use them, I'm shuddering to think what term should describe me!

I take it they are some sorts of adaptations of derivative calculus for finding local minima/maxima (with some curve fitting thrown in to idealize the traces?). I don't come from a financials background myself, but rather statistical modelling for medical research. Wouldn't hurt me to learn the basics of the stats you are name-dropping. I do wonder though whether the liquidity and volume here would be suitable for exploiting those indicators as theoretically conceived, as full of discontinuities as the price traces are.

Hah Hah, Delphi

Not one of these technical indicators would pull Duncan Hunter's needle out of the statistical haystack. He's showing flat line, but recently he polled at 4%, so that could be a 40X return on investment if he starts tracking here on Intrade to poll numbers.

I think you nailed it when you posted the article about what voters are concerned about, and it's the economy, stupid and the War in Iraq. Hunter is the only candidate with a son who is serving in Iraq, and also he's got a military background, he's a hawk. It's actually a mystery to Hunter supporters why he doesn't catch on. Part of it is a fixation on some things like immigration, that the rest of America tends to yawn at. But that doesn't stop them from voting in things like Proposition 187 in California.

Delphi wrote:

I don't come from a financials background myself, but rather statistical modelling for medical research.

If we could graph this stuff the way I would like, I'd be following it from a similar perspective. The graph that comes to my mind is the predator vs. prey dynamic modelling like was first introduced in Grass/Rabbits/Hawks. It was fascinating how they interplayed with each other and how when one did well, the other didn't. The grass grew high because it rained a lot; then there were a lot of rabbits because they ate a lot of grass, but the grass sufered. Eventually, though, the rabbits get overpopulated, lots of hawks come in and eat them and soon the rabbits are underpopulated, hawks are overpopulated and the grass starts growing again.

When one segment is doing well, it's at the expense of another segment, but it's always in a sort of balance. It's the same in politics. So with Thompson tanking, (let's call him the rabbits), that means that the grass should do better soon. I'm thinking Hunter is the grass -- even though he's actually a hawk, to mix metaphors...

I must admit that I'm a little skeptical that these statistical and market trend analysis techniques are all applicable to political markets.

Since we're all being so modest here, I'm an undergrad at Northwestern in political science in physics and the only econ I've had was intro to micro, so I'm totally lost on these indicators. My background there probably indicates my biases, but I'll go forward with the argument anyway.

It seems to me that financial markets are more driven by psychology and other factors internal to the market than political futures are. That is because a stock is worth what the market says it's worth and there's no ultimate authority to say that anyone's wrong. Sure, speculative bubbles often burst, but that's because there's no more new buyers and the whole thing runs out of steam and comes crashing back to reality. In political futures, however, the event ultimately occurs or doesn't and the irrationality is decisively punished where it exists.

I know that doesn't totally rule out the value of these indicators and I would certainly like to learn more about them, I've just been trading on my instincts and trying to catch the occasional high or low based on rudimentary market patterns (for a long time before she announced Clinton oscillated predictably between 40 and 45). That sort of behavior tells me there's something to treating these markets with mathematical rigor, especially when the outcome is far away and 'market' dynamics dominate.

So, that was somewhat incoherent, but I hope we can keep this conversation going.

GAW838 wrote:

I must admit that I'm a little skeptical that these statistical and market trend analysis techniques are all applicable to political markets.
....

I know that doesn't totally rule out the value of these indicators and I would certainly like to learn more about them, I've just been trading on my instincts and trying to catch the occasional high or low based on rudimentary market patterns (for a long time before she announced Clinton oscillated predictably between 40 and 45). That sort of behavior tells me there's something to treating these markets with mathematical rigor, especially when the outcome is far away and 'market' dynamics dominate.

So, that was somewhat incoherent, but I hope we can keep this conversation going.

If I follow your argument, you think there would be more mathematical rigor applicable the further out the event? That is the opposite of conventional wisdom, so I would hope you could elaborate. Maybe you would take a "market dynamic" approach early in the game and then a more instinctual approach as the event comes close (or just stay out).

You kind of went full circle in your message, starting with saying how skeptical you were that these indicators were applicable, and then ending up saying that you "there's something to treating these markets with mathematical rigor". Basically, you kind of lost me.

Here is the key to the whole game:

GAW838 wrote:

In political futures, however, the event ultimately occurs or doesn't and the irrationality is decisively punished where it exists.

It's a zero sum game. You figure out who is most likely to win and how the win takes place, and you lay your money down. Some people can make a living betting on horses, and some may be making a living here betting on political horses. If you can find a statistical edge, it's like getting house odds in your favor. I don't know if there is such an edge, because I'm sure it would have been tried by now. Like an amateur card-counter, some are hoping to find a system that will keep them in the game longer, and the house usually chuckles at such quaint hicks, tolerating them with an eye roll.

Of course there are going to be irrationalities, otherwise you wouldn't see some of these sharpshooters pulling down their bits of arbitrage.

One thing for sure is: It's fascinating.

OK, let me see if I can clear things up a bit.

My broad point was that I think political markets differ from financial markets on the important fact that they end decisively. So, as that end gets closer, the facts on the ground are more likely to dominate over 'market dynamics'. My intuition is that mathematical analysis of past trading behavior would be most useful when market dynamics dominate, rather than when the imminent decisive end probably prevents the formation of speculative bubbles.

I have certainly gone long on contracts that I thought either had no chance of expiring at 100 (like Duncan Hunter at .1) or thought were overpriced if the fair value is supposed to reflect true probability (like Russ Feingold and Bill Frist at various times in 2006) because I expected their prices to go up before they went down. This strikes me as similar to speculative behavior in stock and real estate markets (tech bubble is a good example), except it is what I'm calling market dynamics that burst those and I think there is something stronger that can prevent such speculation in political futures as the end date approaches.

Regardless, I think it would be interesting to apply mathematically rigorous analysis to these market throughout their lifetimes to see what valuable conclusions can be gleaned. I'm just wondering if there's some limit to the applicability of certain techniques because of the differences between political futures and conventional securities markets.

In terms of my trading strategy, I always prefer trading on the long-term fundamentals, but am willing to act against my fair value instincts if I am relatively certain that there is a short term profit to be made. The way I feel most comfortable is trading around a core position that reflects my long-term expectation, selling at local maxima and buying at local minima to take advantage of fluctuations. I don't know enough about the technical indicators to speculate on whether they could be helpful in identifying these tops and bottoms.

I hope that helps.

Cali and Delphi - definitely interested in your thoughts on this.

GAW838 wrote:

Regardless, I think it would be interesting to apply mathematically rigorous analysis to these market throughout their lifetimes to see what valuable conclusions can be gleaned. I'm just wondering if there's some limit to the applicability of certain techniques because of the differences between political futures and conventional securities markets.

This is a lot like a Wednesday night Poker Game. Some guys take it real serious, some guys just have a natural knack, some guys are in it for the beer & pretzels. A mathematically rigorous analysis is too much effort for me, which is why I appreciate that there are these technical indicators in the first place. The way I look at it is that it is mathematically relaxed analysis, and that works for me.

Political markets involve the trading of futures contracts, and the appropriate comparison with financial markets is not with stocks and bonds but with derivatives such as options and futures.

Like political markets, options and futures have fixed expiration dates. For instance, exchange traded index futures (which pay an amount that depends on the future value of the DJIA or S&P500) expire four times a year, on the third Friday of March, June, September and December.

There is an elaborate mathematical theory of derivatives pricing, which is based on the principle of arbitrage: the prices of derivatives must be related to the prices of the underlying assets in a manner that precludes arbitrage.

With political markets, there is no underlying asset, so arbitrage considerations don't tell you what the prices should be. But arbitrage does restrict what relative prices should be: for instance the price of DEM08 in the political party market cannot be much above or below the sum of the prices of all individual Dems. Otherwise one could combine long positions in one market with short positions in another to make a sure profit without taking any risk.

Hope this makes some sense...

By the way, GAW, I'd never have guessed that you're an undergrad with no background in Econ or Finance. Your understanding of these markets is pretty sophisticated.