The media won’t help you trade or understand the markets
November 7, 2008
It’s been said before. It will be said again. I’m going to say it now anyway.
Take what you hear/see in the media about the markets with a MASSIVE grain of salt.
This week has really brought that point back home to me. It seems like just about every day I’ve heard a reason provided on CNBC or elsewhere for why the market is doing what it’s doing, or has done what it’s done. Most of it had very little to do with reality.
The idea that stocks rallied last week and into the start of this week on assumption of an Obama win was a joke. And by extension, the idea of a buy the rumor sell the fact situation explaining Wednesday’s turn lower is a farce as well.
Do yourself a favor. Just watch the market action. It will tell you want you need to know. Very often, the supposed news drivers which people think are creating the short-term moves in the market are mostly coincidental.
If you’re saying right now “Yeah, but when X happened the market reacted by doing Y” then you’re missing part of my point. Data and news events and such mostly have just a short-term impact, which is often just an expectation play. The unemployment rate was better than expected, so traders bought in anticipation of other traders (longer-term ones) developing a bullish view on the market and buying.
That’s not real.
Unless the data or news or what have you actually creates a change massive of market opinion about the future, it’s just noise. The markets don’t make meaningful moves on any single bit of information. They move based on the actions of market participants as they continue to develop their overall view of things.
That said, the reaction of the market to a bit of data can tell you a great deal. There are to major scenarios here. One is the market ignores contrary indications (stock continues to rally despite soft earnings, for example). The other is when the market doesn’t follow through on confirming indication (stock fails to rally on strong earnings). Those sorts of things highlight the underlying view the market holds and can tip you off to what the future will probably bring.
But to return to and reinforce my initial point, use the media for information, but ignore the reasons they provide to explain market action. More often than not they will be useless.
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Aren’t you the media?
a.b.c. – Nope. Obviously this blog is about education. I don’t include market commentary or analysis of any kind here. As for my work, the main focus is identifying good trading opportunities. I don’t try to explain why the market’s moving. I just try to pick out the situations where the risk/reward situation suggests a good play in a specific direction.
“The markets don’t make meaningful moves on any single bit of information. They move based on the actions of market participants as they continue to develop their overall view of things.” Fact is, their “overall view” is no more intelligent, and certainly no more based on fact, than the views of the common journalist. Most traders are trapped in a very narrow void, blind to the world around them. They carry huge prejudices, against workers and small business, against government and regulators, against everything that know nothing about.
And yet many politicians have fallen prey to the almighty markets. For years now, they have vomited forth the brain dead mantra that “the markets know best”.
The markets are blind because those that play in them are blind. As blind as chickens with their heads removed. And today we have no greater proof of that than the behaviour of the markets — auto sales plummet: the markets go up; central banks inject trillions: the markets go down; the madness goes on with neither sense nor reason.
No one can understand the markets, because there’s nothing to understand. Which is all the more reason to ignore them as a measure of the world.
Outstanding post, as usual…
I don’t have cable TV; I don’t subscribe to The Wall Street Journal; I read only classic books and a few blogs; and I feel my sense for markets and contentment for life is right where I want it.
Any source of information that is in business primarily to sell advertising is “noise” and should be avoided.
“I do not take a single newspaper, nor read one a month, and I feel myself infinitely the happier for it.” ~ Thomas Jefferson
“No matter how busy you may think you are, you must find time for reading, or surrender yourself to self-chosen ignorance.” ~ Confucius
Murf – Very philosophical. I can’t go with you in terms of the blind thing, though the market definitely can only see what the participants see, meaning it’s got blurry vision because some players see more and some less and some aren’t looking in the same direction as others. That, though, is why the market sometimes does and sometimes doesn’t react to short-term events (like those you mentioned) as might be expected – because the market is looking at something else or further down the road.
Now, as for whether the market and its overall view is right or wrong, that’s almost irrelevent. It’s market movement (or lack thereof) which produces the opportunity to profit. For example, the markets might be forecasting an economic downturn. Whether or not that actually comes to pass doesn’t matter because until the market reaches a point where the recession expectation runs its course the best trading opportunities will be to go along with the recession trade. That was the point I was trying to make – read what the market is telling you about what it thinks, not what someone tells you is/should be going on.
Kent – I love the Confucius quote. I feel sorry for those who cannot make time to read.