Media commentators have an unfortunate tendency to misunderstand cause and effect when it comes to market action. When two things happen at the same time, it only means that there is correlation, and does not necessarily prove causation. (Maybe there is a causative relationship, maybe not).
This morning is no different. Scanning the news, we can spot more than half a dozen factors that MSM is blaming for this morning’s selloff:
1) Discussions amongst European leaders on Greek debt crisis have broken down (Telegraph)
2) Germany: Bondholders must suffer a loss over Greek bonds (FT.com)
3) Numerous European banks failed their Stress Test (Bloomberg)
4) Regardless of #3, the latest round of industry stress tests were “inadequate,” “overly optimistic,” and “failed to capture the severity of the current sovereign debt crisis” (Telegraph)
5) Several Wall Street firms reduced GDP forecast on Friday;
6) EU Stress Tests revealed trillions in loan exposure to struggling southern European nations. (WSJ)
7) Clock ticking on US debt ceiling negotiations with no real deal in place. (WSJ)
Want to find an after-the-fact rationale for market action? You have an entire menu of excuses for market softness, but I prefer none of the above. There is nothing on this list that wasn’t well known weeks or even months ago. Event he Stress test failures were widely suspected. And if anyone expected a fast compromise deal between the GOP and Obama, they have not been paying much attention the past 2 years.
My view has long been that day-to-day action is mostly noise; if you are looking for “signal” amongst the background static, you should focus on two things: Trend and Oscillators. Trend smooths the noise and provides a basis for directional trading. Oscillators allow you to determine when various metrics with probative value have reached extreme levels that frequently occur nearing major turning points.
The easy rationales for market action should be discarded as worthless; those who push such silliness to a gullible investing public should be looked at askance.
Those who claim to know actually know nothing.
Lose the News (06/16/05)