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Tuesday, December 20, 2011

The Media and Markets' noise

As you know, I follow some popular sites with financial information to get a feeling for the market every day in the morning and late in the evenings. I tend to read more on Marketwatch, Bloomberg, Cnbc. These sites have some other useful tools and features that are nice, but, what I want to focus on today is the news and market analysis posted on these sites every day.

If you've been reading me for a while, you will have realized I barely talk about markets direction, or forecast the health of the world economy or spend 2 sentences talking about fundamentals. And the reason is simple: I don't know much about it! And I consider myself totally unable to forecast market direction or even find a good reason for market direction once it has moved, unless it is a very obvious influential event behind a significant movement.

Most of the media and the main stream sources don't really offer much in this sense either, and instead try to make up headlines that fit the markets. They do pretend every single day of their life. These sites/TVshows/Radio shows are awesome for entertainment purposes! Go turn them on one day when the Dow is in the red for -50 points and listen to all the gurus getting together to explain why it is down -50 points. For fucks sake!!! -50 points is random noise!!! Yet, there is always a reason for them. You will never find a headline reading "Markets down -0.2% for nothing. Period". You will instead always read something like "Markets down on investors concerned about....bla bla bla", as if they've interviewed them all. Such was the headline everywhere on Monday December the 12th when futures opened down: "Investors were concerned about the real effectiveness of Europe's plans to reduce debt.". However on Friday, only 72 hours earlier the markets had skyrocketed and the media was telling us that investors were confident about the outlined European plans that had just been discussed. So, what happens here? Is it like the media says? A bunch of fat millionaires get optimistic about the European talks and 72 hours later, with nothing else in the middle the fat millionaires re-analyze the conversations and now become concerned? Really? In my world, the fat millionaire detects the effectiveness or lack of it right on the spot by a mile!! so, either the markets went up that Friday because investors became optimistic or went down on Monday because investors were concerned but the two things at the same time just doesn't make much sense. What about other reasons for markets to move those days? Maybe there was price momentum, or rounds of profit taking, inflated implied volatility, the upcoming FOMC meeting, expiration cycle that week, markets too oversold or something else. I mean there are so many possible reasons for a market down on a day and up the next and down again the day after! You just can't assume it all happens for a single reason.

This is another nice one "Markets up on strong black Friday sales" hehehe. I mean, isn't that ridiculous? The world plunging in debt, the Dow suddenly up 200 points and it was the Black Friday sales hehehe. Aren't we trying to kill a fly with a cannon here? Maybe sales were up because there are much less Americans now tied to the slavery of a mortgage payment! And perhaps markets went up because the markets were too oversold and long due for a pull back. Maybe, I'm just saying...

Another example. This one is taken from the book The Black Swan - The Impact of the Highly Improbable:

"One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: u.s. TREASURIES RISE; HUSSEIN CAPTURE MAY NOT CURB TERRORISM.

Whenever there is a market move, the news media feel obligated to give the "reason." Half an hour later, they had to issue a new headline. As these U.S. Treasury bonds fell in price (they fluctuate all day long, so there was nothing special about that), Bloomberg News had a new reason for the fall: Saddam's capture (the same Saddam). At 13:31 they issued the next bulletin: u.s. TREASURIES FALL; HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS.

So it was the same capture (the cause) explaining one event and its exact opposite. Clearly, this can't be; these two facts cannot be linked."

What I have seen, and I haven't seen much, but what I have seen tells me that many times markets go up and down regardless of positive/negative news. It's all about perception. And it often happens that after a while being down simply because there is less selling pressure, bears become scared to keep shorting at lower prices while at the same time bulls willing to put their money in cheaper valuations after downside moves, and this may happen in the middle of good/bad news. And similarly when after a rally, there is a pull back. I'm not saying fundamental news don't matter, of course they do! And they do shape up trends in the long term. But I'm saying there are fundamentals and fundamentals, and the part about explaining the +-50 Dow points move, don't even get me started!!!

Minor moves on a day can't be summarized with only one reason on a headline. How many things happen on the planet daily?!?! I even dare to say, remove the news on a day, let's assume there is a day where there are no news at all. Journalists decide to take a universal break. No news at all, but the markets and the rest of life goes on. Do you think the markets are not going to move that day? Of course they will! Well, apparently not for the media. "There's always a story, always something happening during the day somewhere in the planet that explains everyday movements".

Choose any day, randomly in the past or future. There are going to be at least 10 news, economy related news that are good candidates to explain market daily moves. At least 10! The earth is just too big for only 1 news. Ok, now, out of those 10, some will be positive and some will be negative. If the market trades up, the media will choose one of the positive, and if the market moves down, the media will choose one of the negative as the headline for the day. They will barely talk about the other 9, and you, the reader, become absolutely convinced that the sky is falling and there's nothing positive to be glad about for the day.

I recently read a very clever article about the influence of the media in the markets and the way headlines are selected. I totally recommend it. It touches a lot of interesting points and if you want to be in this game (I do!) I think every serious trader should be aware of these things.

In the end, the media is made up of journalists who get paid for writing something. If there's nothing clever to write, don't worry, someone will make it up. Announcing the numbers of the markets on a particular day without saying anything else, is useless, and that doesn't build any readership. People would just get the quotes at yahoo finance and wouldn't read journalists at all. And we all agree here, journalists, gurus, editors etc have families! and they all need to eat! So, let's give them a break!

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