How Market Reacts to News
Information hits tape, then what?
I read the news today oh, boy
-A Day In The Life (The Beatles)
Experience shows that, if one foresees from far away the designs to be undertaken,
one can act with speed when the moment comes to execute them.
-Cardinal Richelieu, 1585-1542
Rulers see through spies, as cows through smell, Brahmins through scriptures
and the rest of the people through their normal eyes.
-Kautilya, Indian philosopher, third century B.C.
There is a lot written about the "news" lately. There's been a lot to write about. There's a lot of ink, digital and otherwise, about what the "news" will "mean" for the markets. There is a lot of time and effort devoted to try to figure out what the "news" will imply for the future direction of stocks.
Let me say this about that. First of all, which stock? For example if a Shaman had sprinkled some fairy dust on your head and you knew that the DJIA would be up nearly 200 points on Monday but a gun had also been put to your head regarding whether you had to buy or sell Google (GOOG) yesterday with the foreknowledge of what the "market" would do on Monday, what would you do? If I were a betting man and I am, I would venture that probably 99 out of 100 traders would have bet on GOOG going up yesterday. After all, the stock has well tested the $500 psychological and technical support level. Who would have said the GOOGler would break such support on a day when the DJIA exploded?
There has been a lot of extraordinary news and an extraordinary amount of polarized views regarding what it all means.
Frankly dealing in absolutes as to the meaning and lasting effects of "news" is to say the least an overwhelming endeavor. Applying a rational analytical framework to something inherently emotional and mercurial is a hit and miss strategy.
We've seen the "news" matter; we've seen it shrugged off. As R.N. Elliott offered, "the general belief that current news affects the market is widespread and even exploited. If current news were responsible for fluctuations, cycles would not occur."
For example, in the midst of the Great Depression would listening to the news of the day put you in a position to have anticipated a five year rally coming off a low in July 1932?
With Hitler's troops marching through Europe in the early 1940's and the US fleet smashed in December 1941, would applying the news have indicated that the end of a 13 year triangle and correction since the 1929 top had come to an end in 1942?
The reason I bring this up is because while the Street is swallowed up in the belly of the three-headed securitization beast – Subprime, Collaterized Debt Obligations, and Credit Default Swaps, it has been a month now since the January 22-34 lows. From where I sit, the longer that low remains intact the greater the possibility that my notion, offered at that time, that this low may well have marked the low for the year may in fact play out. We shall see.
While the "news" is debated and the financials are faced with the fate of further writedowns, the "market" in its own inimitable way appears to be looking for any excuse to go up in the last few days.
Let's be serious. The rating agencies maintaining the bond insurers AAA rating for the time being while they remain "under review" is a creampuff. The rating could be pulled at any time. It reminds me of a company announcing they are going to buy back shares – they may or may not do so at any time.
My point is the old saw that it's not the "news" but reaction to the "news" is a chainsaw: it cuts to the core and quickly. The market appears to be looking for an excuse to go up.
That it is poised to go higher, shakeouts notwithstanding, is demonstrated by a change in behavior.
- The S&P followed-through after Friday's "news" reversal.
- The index shows two large-range upside days.
- The index closed above the prior short-term resistance on Monday. In so doing it appears to have convincingly broken out of the well advertised pennant after breaking down from the pennant. This, after a series of marginal breakout fake-outs both up and down.
- The Weekly Swing Chart on the S&P turned up on Monday and so far the ensuing action has been constructive, i.e. bullish.
- The Double Down Inside weekly pattern on the S&P that I previously mentioned suggested an upside resolution. That upside resolution seems to be playing out.
Significantly, several patterns and cycles suggest the possibility of a multi-week (as in 2-3 weeks) rally into March. I will go into more detail on this analysis in tomorrow's column. However at this time it is worth mentioning again the Mirror Image Pullback from 2002 to 2007. Last year I offered that March should be a pivotal turning point. Why? In July 2002 the market climaxed in a waterfall capitulation selloff. That low was undercut in October 2002 while a successful Test of a Test Pattern to a higher low was carved out in March 2003. In July 2007 the S&P made a blow-off peak that was marginally overthrown in October – and on the precise anniversary of that 2002 low no less. The March 2003 test occurred on March 11-12 of that year.
In tomorrow's column I will go into the technical reasons why I would not be surprised to see the S&P magnetized to as high as 1440 into March.
While the "news" may not be good and a multi-week rally may not be in order, it is not, as a trading buddy commented to me yesterday, out of order either.
As R.N. Elliott stated over 60 years ago:
"The importance of accurate forecasting has resulted in an immense increase in the use of statistics. A comparison of files of newspapers of 50 years ago with those of today would be a revelation in this respect. Millions are being spent to find a satisfactory forecasting device, but the search will be fruitless without recognition of the fact that the habit of the market is to anticipate, not to follow."
I don't fully comprehend the facts, the statistics or the news. I'm just a trader. I leave that to those smarter than I.
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