Divergence trades represent a clear chart pattern of slowing price direction. At the same time they are countertrend trades and have a higher degree of risk. Before the October 1987 stock plunge, there were numerous divergence signals in the S&P, both long-term and short-term, and many traders posted losses trying to sell what might have been the top of the market. Most gave up before the decline. If, in fact, the greatest opportunities come when the divergence is strong, that is, the decline in the momentum peaks is large. then the best results will come from entering a short position, then holding that short when a long trend turns to a short one. By entering the trend trade early (and exiting the old long position), a divergence can become a large profit rather than a small one.
Given its monopoly power over the legitimate use of force, people have a tendency to believe that the government, particularly a democratic representative government, can solve all types of problems. Further, if things do not go well, people tend to think that it is be- cause the “wrong” people won the last election. Public-choice analysis suggests that the problem is more fundamental: there is sometimes a conflict between winning elections and following sound policies. For some types of activities, there is reason to believe that the political action that will help get one elected will, at the same time, reduce income lev-els and living standards.
Both the market and the political process have shortcomings.
Understanding the strengths and weaknesses of both sectors is important if we are going to improve our current economic institutions. When the government protects property rights, enforces contracts, and provides a stable monetary environment, economic prosperity is more likely to ensue. The basic problem, however, is how a society can obtain the benefits of the protective functions of government and at the same time constrain it to those activities where it is a productive force.