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Even Though


Not what they are saying, what they are implying...

Apropos of our earlier Buzz & Banter re: the nonsensical logic train involved in "blaming" an already 7 day old downtrend in the SPX on an over-the-weekend political event, I have heard and read commentators all day today saying: "Even though" as they describe stock price declines. To wit:

"Even though WalMart is now forecasting March same store sales at the high end of their 4-6% range, WMT shares are down 1.5%."

"Even though Sprint was upgraded by JP Morgan this morning, the stock is down almost 2%."

You get the idea.

The overwhelming desire to attribute cause and effect when it comes to financial markets can cause otherwise temperate people to make some rather vast leaps of causal faith. And today is a day when such leaps are in full display as market observers match a jumble of events to their supposed outcomes. And they mostly get them wrong; it can be no other way.

Though it is a common sense observation, it remains an extraordinarily uncommon understanding: stock prices, or the prices of any negotiated financial instrument for that matter, reflect the net psychological forces of the buyers and sellers. An infinite number of factors, of course, affect the psychology of the buyer and the seller: fundamentals, domestic or international political events, charts, quantitative models, other markets, etc. At any given time, there are an infinite number of complex factors that affect the aggregate psychology of buyers and sellers; some are primary, some are secondary, some even act with a feedback-type mechanism (both positive and negative). But the core of the message is thus: there are an infinite number of causal factors that net to a stock price's move up or down.

Given that complexity, taking ONE of those factors and holding it out as the causal reason for a stock price advance or decline is deeply flawed. It tells you next to nothing about what is really going on.

But the tone of the pronouncements can tell you a great deal more about the marketplace than the words themselves. "Despite" better-than expected earnings, or "even though" the stock was upgraded, or "notwithstanding" a positive article in Barron's: all suggest that the speaker is strongly biased toward being bullish.

So don't listen to what they say, because it won't help you understand what's really going on. Listen to what they imply, because that will help you understand the prevailing bias. And since markets never reward the consensus bias over time, knowing the bias will actually be worthwhile.
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Position in WMT

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