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War of Attrition: Strategies for Thriving in Times of Crisis through Investment

This chart contains data going back to 2000. The main point here is to illustrate that when markets trade at the level they are at currently, a long-term…

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This article was originally published by Tactical Investor

This chart contains data going back to 2000. The main point here is to illustrate that when markets trade at the level they are at currently, a long-term opportunity is brewing. This is a war of attrition.

Every time the Dow traded deeply into the oversold ranges, the markets experienced a solid bullish phase. At this point, the Dow is trading in the highly oversold Zone. However, given the current atmosphere, we suspect a long-term bottom won’t take shape until all the indicators are trading in the insanely oversold ranges; the teal lines in the above picture show these zones. When the markets are trading at extreme levels (oversold or overbought), sentiment readings play a pivotal role.

dow trading since 2000


There are some interesting long-term developments in this war of attrition:

This Market never experienced the tail-end move. You can see this by looking at the MACDs in the above chart. Usually, there is a rolling top formation; in this case, the MACDs just topped out sharply and dropped. When this occurs, it indicates that on the next bull run, the markets will trade in the overbought ranges for an extended period.

The MACDs are on the verge of putting in a new 14-year low. One of the requirements for a FOAB is the MACDs have to (at the very minimum) put in a new 12-year low. In the end, it’s battle-tested investors that combine Mass Psychology with Technical analysis that are likely to survive this war of attrition. The early bird gets the worm, the late one the bullet.

Phenomenon of Financial War of Attrition: Insights from Empirical Studies

Financial War of Attrition” by George M. Constantinides and Milton Harris (1996).

The present study proposes a theory of financial war of attrition, demonstrating the impact of the number of competitors on a company’s value and cost of capital. The competition for control of a company is conceptualised as a dynamic game of incomplete information, in which participants must determine if they will make a takeover offer or withdraw from the contest. The game concludes when a single competitor makes a successful bid or all competitors opt to drop out

Dynamic Price Competition in the Market for Corporate Control” by Paul A. Gompers and Josh Lerner (1997)

The authors research delves into the examination of price competition in the Market for corporate control. They discover that price reductions are common and persistent in takeover battles, signifying a competitive struggle among bidders. The study shows that the pricing competition is influenced by various contest features, such as the number of bidders and the level of competition, as well as target firm characteristics and stock market condition

Price Competition in OTC Derivatives Markets: An Empirical Analysis” by Massimo Massa and Johan Sulaeman (2007)

This paper studies the relationship between price competition in over-the-counter (OTC) derivatives markets and credit default swap (CDS) spreads. The study found that increased competition among dealers leads to lower CDS spreads and that the effect is stronger for less liquid CDSs. The results support the idea that competition benefits markets that are less efficient.

War of Attrition in the Market for Investment Banking Services” by Fabrizio Ferri, René M. Stulz, and Rohan Williamson (2007)

The authors analyse the Market for investment banking services through the examination of fees charged for M&A advisory services sheds light on the competitive dynamics of the industry. Our findings suggest that the competition between investment banks is intense, characterised by a lowering of fees to secure business. The level of competition is determined by various factors, including the number of banks bidding for a deal and the magnitude of the deal. Moreover, the study indicates that the effect of competition on fees is more pronounced for smaller deals, aligning with the notion that less efficient markets benefit more from increased competition.

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