FBreughel1, as may be obvious I am a bit pedantic so if I am about to proceed to rewrite what you meant in slightly different language I apologise in advance.

Deterministic means that there is no random component, ie if I put the same input in I will ALWAYS get the same output. Random is non-deterministic. Predictable means that given knowledge of the initial variables with a certain error, at any future time I can state the output with a certain error. Deterministic and predictable have nothing to do with each other. A system can be random and have predictable outputs and deterministic and non-predictable. Chaotic systems is another name for non-predictable. A Chaotic system can consist of a small number of variables and a typically rather complicated interactions – for instance the Lorenz equation or logistic equation. A complex system is one with a large number of components each with simple local behaviour but which exhibits complicated – possibly chaotic – global behaviour.

The sense in which “traditional cause and effect” is chucked out is that people assume if there is a big effect that the cause has to be large and that these jumps are not simply inherent in the system. For instance if 5 days the market tanks then it must because of X whereas it can be lots of little things feeding back on each other.

What’s often missing, from a practitioner’s point of view, are the explanations of why the market doesn’t move when some piece of news upon which you have built a strategy happens, and yet you reap no benefit from your correct expectation.

Plenty of situations which build slowly. Understanding the growing context within which the individual stocks trade can help to anticipate risk factors — risks that often are not yet fully recognized by the market.

Might somebody reading the financial pages have recognized the risks to the financial system in the summer of 2007? Perhaps taken that as reason to stay away from the apparent bargains in LEH? Or reading about the European turmoil, decided to step away from those stocks for a few months?

The trick, naturally, is reading what “might be” rather than what has already happened.

FBreughel1, if it was all noise then that would be a proof of the efficient markets hypothesis which states exactly that. Secondly, again to be pedantic, butterfly phase diagram and what the other guy said are completely different mathematical concepts.

SelenesMom, that is because fundamentals don’t drive day to day price movements, market microstructure and noise do.

But the sports analogy is apt here. You don’t draw conclusions on the state of a baseball team from one game (ok, the Mets are an exception), just as you don’t do the same from the market. Which is where context comes in. Boring, repeated, restated, and then repeated context. Again and again.

But the job of a market reporter – and I haven’t written any confessionals, though I’ve been doing it 15 years – is to understand short-term events, medium-term events, and long-term events and the changes, as they happen, by reporting on it. Constantly.

Because if there’s one thing Felix can agree with me on, it’s that muscle memory means a lot. The more you write, the more you write, and so it is with reporting. Never covering a market, only to wake up and try to discern just what a big drop in stocks means at a given moment, is not an easy task. And it would rob the reader of the expertise one gleans from doing this on a daily basis.

Does that mean that every market report is one that investors should act upon? Hardly. Does that mean every market report is going to be a humdinger that we hold up as a prime example of amazing journalism? No. But there are reasons for this day-by-day understanding, the blocking and tackling, so to speak.

But Felix is English, so he doesn’t get American football analogies.

Check how much value funds manage as a percentage of assets under management and check how much of the short-term trade flow they are part of. If journalists called major brokers, then a) the broker would put the phone down on him/her and if not then b) they will say what i just said.

In your example if the markets tanked after the S&P downgrade for 5 days did they bounce back up again on the 6th?

Markets tanked for what 5 days after the S&P US downgrade.
There are 5 days happily explained, for example.

If journalists had the access they could happily call some major brokers who would be able to at least describe the flows.
Those guys could then ask their major accounts on the day WHY they had chosen to buy/sell at that particular moment.

Sure some of it is technical or momentum or HFT driven but I still believe LOTS is fundamental.

Felix and Mr Black have not shown me any EMPIRICAL evidence that >50% of the trading days have a market move that cannot be explained.

This isn’t a question of chaos theory or “noise” – it is a question of discovering the underlying motives behind market participant action which is surely possible.
Perhaps not possible for CNBC though!

cptcodfish, with all due respect, you missed the whole point of a complex system. That is that there is a large population and the local interactions are simple and usually deterministic but that the global behaviour is not predictable. For at least 40 years now we have known that even if you do know 100% the behaviour of the individuals and the interactions and even if they are deterministic then there can be a strong limit on predicting the behaviour of individuals in the system. Note this does not mean you cannot make any predictions. Also Butterfly effect has nothing to do with cause and effect. Again these are technical terms that have very specific meanings and you mangled them.

As for journalists, they add to the noise except that they work in a feedback loop. One journalists write about A, then the others just cut and paste and before you know it they are having a short-term market impact – one with possibly large long-term consequences.