Cracks in The Law of Supply and Demand?

[firewalker 10]

(3) It wasn't me who said the markets moved according to supply and demand, it was Wyckoff and probably others before and after him as well.

 

Not exactly.

 

I don't know how many different interpretations one can give to the text below, but it seems self-evident that when Wyckoff was talking about the 'basic' law of supply and demand, he was talking about the one from economics. Quote:

 

"... I realized that the Basic Law of Supply and Demand governed all price changes; that the best indicator of the future course of the market was the relation of supply to demand.

 

And furthermore:

 

"The Law of Supply and Demand operates in all markets in every part of the world. When demand exceeds supply, prices rise, and when supply is greater than demand, prices decline. "

 

As I tried to point out dozens of posts ago, the law of supply and demand as it relates to economics is not the same as the law of supply and demand as it relates to the markets no matter how much one may believe otherwise.

 

This isn't about what I or anyone else believes, or wants to believe. I thought we were discussing what Wyckoff wrote. Either you agree with it or not, but as you started the thread 'The Basic Law of Supply and Demand' it seemed logical of me to assume you were in agreement with what he said. If not, I apologize for making incorrect assumptions. Fwiw, I already stated that there were two important assumptions when talking about the law of supply and demand, often overlooked, which definitely help make the distinction.

 

It was to avoid this source of confusion that I stopped referring to "supply and demand" years ago and began using "buying pressure and selling pressure" instead, which is what Wyckoff means. Unfortunately, I had to pick up the supply and demand terminology again when nic and I started the Wyckoff Forum. That, as it turns out, may have been a mistake.

 

I don't know if it's been a mistake. Perhaps it's good to clear some things up. As for using the words "supply" and "demand", we still talk about supply- and demandlines, perhaps in lack of any better word.

 

The market does not sell goods and services. It sells hopes and dreams, and the "law of supply and demand" that operates in the markets is not very different from that which operates in other "tangibles" that have little or no intrinsic value such as fine art, collectibles (depending), gems, and, in certain circumstances, real estate, among other things. Anyone who doesn't understand this is in for a hard time.

 

Quote:

"This is true not only of stocks; it is constantly being demonstrated in markets for wheat, corn, cotton, sugar and every other commodity that is bought and sold; also, it is reflected in other markets such as real estate, labor, etc."

Edited June 26, 2008 by firewalker

[MA1 10]

First thanks to Fire Walker for starting this topic, to Zdo for asking hard questions and not being content with the KISS answers, and to Soul Trader for allowing the discussion to continue with the LATC questions..

 

 

The market does not sell goods and services. It sells hopes and dreams, and the "law of supply and demand" that operates in the markets is not very different from that which operates in other "tangibles" that have little or no intrinsic value such as fine art, collectibles (depending), gems, and, in certain circumstances, real estate, among other things. Anyone who doesn't understand this is in for a hard time.

 

Can you say what market you mean, are you meaning the futures market, and which one? The CL contract is 1,000 barrels of oil, no? Is that not a good? Maybe it is hopes and dreams for small retail trader, but what of other players (who make up most of the trading volume?), they might be more calculated and rational? Or is this thread only about the ES contract?

 

How does the market for oil (I use as an example) be not very different as the market for fine art? Then how does the market for SP and ES be not very different to that for fine art (each piece of fine art is unique, a futures contract is a standardized product)? Not very different, how is it not very different? No differences, some, lots, what are they? Sorry for all of the questions, but respectfully the post does not make too much sense in that it does suggest something but then not explain.

 

My idea is the fine art market and futures market are very different in many ways (similar in some, of course, but so is a lemonade stand); very, very different nature of product, very different structure (double auction futures mkt, trades nearly all day 5 days a week, fine art market the occasional auction after much marketing and publicity), and so on. I am willing to try to understand your point if you could explain on what you mean?

 

But changes in the price is due to hopes and dreams? Maybe for the small retail trader, but most of the volume is not the small retail player is it? Most of the volume is from colder, more rational players. Never entirely rational, as humans always some hopes and dreams, but only minimal for these players, too firm a grasp on reality for hopes and dreams to play too much of role in the decision-making. Hopes and dreams model of supply and demand … not very precise and back to simplification because not understand reality? (but nothing wrong with not understanding reality, it is hard work, but a trap is dismissing it with an incomplete explanation?).

 

 

If I had to compare the ES to an item, I would compared it to Lego blocks (the plastic blocks that connect to each other for any poor soul who has never seen lego).

 

Throughout the day, it remains Lego. It is always $50 x S&P 500 . However, it constantly forms different objects, which I base decisions off - I demand / supply these objects. Once the object is 'created', imagine a corresponding D&S curve is created.

 

A 'double bottom' at 1300 after the market has fallen for a week, is a different object to a market which has rallied all week to hit 1300.

 

Smwinc – your basket-ball example, your lego example. But I disagree. It is not the basketball (the traded good) that changes, it is the perception of the value of the basketball that is changing. In a futures market, it is not the CL contract that is changing (standardized contract) but the perception of value of the contract that is changing.

 

Different perception to different traders & different perception depending on where it is in the ‘pattern’. The ES a bit more difficult to understand =, it is cash settlement, physical dollar bills if you like.

 

Lego example is nice, lego shapes can change (like you say “A 'double bottom' at 1300 after the market has fallen for a week, is a different object to a market which has rallied all week to hit 1300.”) but it I say it is still a lego (still CL, still standard contract).

 

Change in the shape made from the lego changes the perception of value, but doesn’t change the lego. My point is this does not explain price change and supply and demand in the financial markets. I think as the shape changes you (that is smwinc) will recognise that maybe it is a changed ‘good’ but few other players will recognise the exact same thing, others will think of something different, and each will value the lego different but it is still lego (easier to use the CL contract, it is 1,000 barrels of oil). Change in perception (lego changed shape, but different shape to different traders) --> change in perception of value --> trade --> change in price. I hope this is not seen as a pedantic argument, but I think this ‘the contract is now something different’ is the wrong idea smwinc, so disagree with respect.

 

I understand you say you are trading the pattern and demand and supply varies according to the pattern in effect, but you are really trading the contract, the pattern is what is giving the perception of value, it is not changing the good (contract) itself.

 

Hope my post furthers the topic (and is not too KISS for you Zdo ;-) ). – Mary.

[BlowFish 10]

So's gold. But, like gold, they have no intrinsic value per se.

 

Ahh but you can't eat gold I was thinking grains, beans etc. Funnily enough I'm having pork belly for dinner today. Very underrated!

 

Still, interesting point you make. Whilst some things may have intrinsic value due to their function it could be argued that most do not. I guess foodstuffs are about as intrinsically valuable as you can get. Anything beyond that (talking about consumer products) is getting 'derivative'. I guess what I am thinking (I am making it up as I go along) is that perhaps traditional marketplaces for goods and services are not so dissimilar to the markets we look at each day. People buy and sell goods and services to make money to by food & shelter with some left over for 'luxuries'.

[DbPhoenix 42]

This isn't about what I or anyone else believes, or wants to believe. I thought we were discussing what Wyckoff wrote. Either you agree with it or not, but as you started the thread 'The Basic Law of Supply and Demand' it seemed logical of me to assume you were in agreement with what he said. If not, I apologize for making incorrect assumptions. Fwiw, I already stated that there were two important assumptions when talking about the law of supply and demand, often overlooked, which definitely help make the distinction.

 

You are focusing on only a small part of what Wyckoff wrote. You are also attempting to apply academic theory to the stock market, and since neither perfect competition nor perfect knowledge apply, neither can the academic theory.

 

The fact that someone uses the terms "supply" and "demand" and any "law" thereof does not necessarily mean that he is using them in the same way as everyone else who uses the same terms. If you insist on being literal, you're going to miss much or most of what Wyckoff is trying to say.

[zdo 20]

zdo - David actually said Market "movers".

 

Yes. Thanks. My intention was to ask what he meant by 'market movers'

Too much drive by posting - my apologies. But still not too much golf...yet

Question still stands... thx in advance David

[zdo 20]

This thread is drifting in and out of discussion about utility and fungibility. Foods, lego configurations, basketballs, hopes and dreams, ES, futures, oil, art, etc.

Serious, ie not rhetorical, question – is that part of the issue here of intermittent anomalies in what prices ‘typically’ / ‘should’ / ‘normally would’ do in a given supply and demand context?

[MC 10]

This thread is drifting in and out of discussion about utility and fungibility. Foods, lego configurations, basketballs, hopes and dreams, ES, futures, oil, art, etc.

Serious, ie not rhetorical, question – is that part of the issue here of intermittent anomalies in what prices ‘typically’ / ‘should’ / ‘normally would’ do in a given supply and demand context?

 

These deep thinking threads always make me LOL. Not that they are bad, these really get us all using our minds which is great. It's just funny to hear all the opinions fly around and sometimes the debates that ensue.

 

I probably would not have done that post about 2 chains of S&D without this fire under me. That 2 chain theory is one I've had for awhile now and just decided to test the waters here.

 

As for the basketball example, I have a twist that works for my view of the market...

You start with a basketball from Walmart bought at the reasonable retail price of $10. At some point the owner signs the ball Michael Jordan and claims to be selling a MJ signed ball. The bidding goes up because what was worth nothing and was common, is now all the sudden deemed a rare piece of memorabilia triggering peoples emotions and greed. As the bid goes higher so does the interest in this item, it must be worth even more otherwise why would people be so interested right? The advertised price is now extreme and the original seller, knowing it was a fake, prances away with $990 in profit. Now the new owner only bought it based on his greed, so he turns around to try and sell it for $2000. Only now there is no COA (certificate of authenticity) and people are questioning the validity of the signature. Now his offers are now in the $500 range, because there's still a slight chance it's legit and greed tells bidders they could still resell for profit. Fast forward...it's been exposed a phony signature. The bid collapses and now is back to being worth $10. The owner tucks it away for a few years till he has a garage sale. There someone buys it for $20 despite being told it's a fake. The seller is just happy to get some money back, and the shady buyer knows the signature is passable. The new owner opens an auction with new naive customers who know nothing of the prior auction. What do ya know, he sells the ball for $1000 again, and the cycle repeats over and over.

 

Of course there's allot more in the markets movement than a clear cut point A to point B. This is a simplistic look at things to say the least. One thing to take from this may be that what transpires in the middle is essentially noise and greed driven. The greed portion can linger on for quite some time as long as the hope of selling for profit is around. Now on the other hand, the extremes of the range often have quick reactions thanks to fear being the stronger of the emotions.

Another reason I feel this is a fair depiction of the market is the fact that the ball holder creates the bag holder. This market is not a fair game, there is deception at work. The "smart money" in the market preys on "dumb monies" greed and fear. "Not fair" some would say, well no, but what in life is fair? :o

 

[firewalker 10]

This thread is drifting in and out of discussion about utility and fungibility. Foods, lego configurations, basketballs, hopes and dreams, ES, futures, oil, art, etc.

Serious, ie not rhetorical, question – is that part of the issue here of intermittent anomalies in what prices ‘typically’ / ‘should’ / ‘normally would’ do in a given supply and demand context?

 

I think there has been a lot of valuable and original input. Getting slightly off topic is not uncommon, but in this case I think the thread so far has been quite interesting.

 

All comments were, and still are appreciated...

[SunTrader 10]

I don't see the basketball 'market' on EBay or elsewhere on the net as comparable to trading on the CME. Whether or not today, the eMini should be 1275 or 275 or 2575 is open to debate that S&D dynamics will determine.

 

But whether or not memorabilia, if the legitimacy is known, should be higher or lower is based only on people willing to collect them. Ex. the basketball can't be played with or it loses value. Also I doubt it is possible to 'short' collectibles.

 

Apples and oranges.

[MC 10]

I don't see the basketball 'market' on EBay or elsewhere on the net as comparable to trading on the CME. Whether or not today, the eMini should be 1275 or 275 or 2575 is open to debate that S&D dynamics will determine.

 

But whether or not memorabilia, if the legitimacy is known, should be higher or lower is based only on people willing to collect them. Ex. the basketball can't be played with or it loses value. Also I doubt it is possible to 'short' collectibles.

 

Apples and oranges.

 

True, sometimes you have to relate to other things to help people get an image of psychology though. It's about PERCEIVED VALUE and emotions, that was the intended point in my post anyhow, not the type of item.

 

Maybe you could go long Larry Bird collectibles at premiums and that might spook off Jordan buyers, in effect acting as short pressure? LOL J/K