As investors ourselves and consultants that guide financial institutions around the world, one question we often get is around the primary function of the market and how that relates to creating liquidity. And in reality, the market creates this liquidity by creating uncertainty.
High uncertainty can be characterized as a large divergence or disconnect between buyers and sellers. This misalignment of liquidity profiles between market participants represents a highly liquid market. And it is in the terminal stages of maximum uncertainty where we see the formation of market bottoms and the commencement of new uptrends.
Conversely, during periods of low uncertainty, the market can be characterized by an over-alignment of the liquidity profiles when market participants are lined up on one side of the market. It is in the terminal stages of low uncertainty where we see the formation of market tops.
Essentially, market bottoms can be characterized by a high degree of uncertainty whereas market tops are better characterized by a low degree of uncertainty.
And ultimately, by precisely measuring these levels of uncertainty we can identify the most opportune entry and exit points for securities of various asset classes.
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