I read a banner ad online the other day; it was from a financial guru selling his trading techniques. Interestingly, his very witty tag line goes something like, “predicting the stock market before it goes up.”
Clever I thought, he can predict the markets before they go up! I'd hate to think he could sway investors by being able to predict market moves after the fact.
Mind you, it’s not really predicting then is it? And if you failed at predicting the markets after the fact…you need a lot of help. Regardless, his irrational lack of creativity leaves me cold…so does his idea of being able to predict…anything.
If there’s anything I’ve learned over the last two years…it’s that traders, analysts and gurus of every ilk have difficulty predicting the future on Wall Street, Fleet Street, and Bay Street…we also tend to trade irrationally.
The trading patters of this past week did nothing to prove me wrong. Even with all the statistics, trends, patterns and indexes at our disposal…the markets, at least to me, defied the obvious.
For example…most penny stock investors get their information about the stock market from mainstream news media. Regardless of where you pull your financial news, - - CNBC, The Wall Street Journal, Yahoo Finance, etc. -- everyone watches the same headlines, trying to interpret how it will impact the markets.
Trading patterns this week however, baffled me to some degree. For example, on Wednesday, August 26, at 8:30 a.m., the U.S Durable Goods Orders report was released, and at 10:00 a.m., New Home Sales was reported.
Economists were looking for a 3% rise in the Durable Goods Orders, the 8:30 am report came in at a robust 4.9%; the biggest gain since July 2007. Knowing that the markets always react to economic news, I (foolishly) expected the markets to open with a decided uptick.
At 9:30 a.m. the Dow Jones Industrial Average opened lower. Why? Not sure really…I think the hard hitting news headlines said it best, “U.S. Stocks Slip Despite Upbeat Durable Goods Data.” Maybe some news is too good to be true. However, I’m pretty sure a 1% slip in Durable Goods would not have had the opposite effect.
Later in the morning, New Home Sales report brought more (seemingly) good news. Single-family home sales across the U.S. also beat economists' estimates and jumped 9.6% in July, the most in four years.
Did the markets reward the positive news? Not really. After the report the Dow moved slightly higher – climbing a modest 20 points. Why? According to one report, the positive U.S. economic news was water-boarded by concerns that China may seek to rein in growth and excess capacity.
In spite of the economic data, like a sports team winning the pennant and immediately donning their championship hats, somewhere an analyst is publishing one of two reports written earlier in the day. If stocks move up, “the markets respond favorably to economic data,” story is released. If stocks move lower, “investors remain cautious, sending markets lower,” is uploaded.
The point is…this week clearly demonstrated that I am terrible at predicting how the markets at large are going to react to news. Or maybe, because it’s the summer holidays, fewer people were watching the news…and the markets just flatlined on weak volume. Or maybe investors just decided the good news was already factored into the markets.
Granted, it’s not as if the markets are in a bad spot. In fact, the stock market appears to be fairly healthy. Two major stock indexes, the Dow Jones Industrial Average and the S&P 500, are up more than 40% from their lows in mid March.
Much of the current rally has come in two spurts. The first came in the spring after the government revised its banking bailout. The second is, over the last six weeks, the Dow has risen 16%, the S&P 500 10%.
All of this is to say…in this current market even the most reliable indicators can’t be trusted when it comes to deciding when to enter a trade. Nor will they indicate how long a market may stay in a trend. As one article I was reading noted, “the old axiom about the market remaining irrational longer than you can remain solvent,” comes to mind.
Is the market irrational? Maybe we’re just a little confused. After all, we tend to learn from our past. Unfortunately, I’m not so sure there’s been another point in history that quite echoes the current economic climate. There really isn’t anything we can point to or use as a barometer for sustained growth.
The ingredients that went into making up this Great Recession are unique…and traditional comparisons don’t work. So I say hats off to those Wall Street prognosticators who can “predict the market before it goes up.” I’m just not sure there is one.
