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Market Comment: Does News Even Matter?

November 13, 2008 7:37 PM

perplexed.jpgI have long stated that the market is not rational, and it certainly is not efficient. I have also long mentioned that news is simply not important and cannot be used as a trading guide. On any given day it just flat out does not matter.

If you have been skeptical of this view, let’s look at today and the “news” that logically should have crushed the market. Instead, it rallies 900 points off the low.

Here is today’s news:

1. Unemployment skyrockets again, far worse than estimates

2. Intel warned last night that things are getting ugly

3. Chrysler CEO says that they basically cannot survive without a bailout. Ok, so that’s only news to people living in fantasy land.

So let’s look at this. We are just entering a likely very severe recession, not leaving one. Unemployment is getting worse and will continue to do so. Intel’s warning clearly eliminates any notion that tech companies are somehow immune from the recession.  The big three automakers are literally on the brink of going under, but admittedly I understand that yours and mine tax dollars will keep them afloat. Foreclosures up another 25%. The result of all of this near depression era news? 900 point rally off the low.

Why did this happen? Because the Dow low was important and the SP low was not. I have said this over and over and over that the SP low was NOT the low. Even one of my brothers asked me the other day “what low do you like on the SP?” I said emphatically NONE. The only low that matters is the Dow low, people are wrong.

People today bought above the Dow low and were going to do so unless it cleared. It literally is as simple as that. Unfortunately I thought the low might be tested tomorrow and set up a great chance to long with minimal risk. I saw the reversal at 818, but knew we had to close positive on the day and it just seemed unlikely at the time. If you notice the vast majority of the move came in the last hour. We were barely positive at 3:00 EST and the outcome was still in doubt. I then said “if this high clears, shorts are going to freak out and we are going straight up”.  I then said “watch”. Why? That is simply how the market works.

The point of this post is many people are probably shaking their heads in complete disbelief that the market would rally 550 points and 900 points off the low on depression news. It makes zero logical sense, on any level.  Does it really matter? No. The market is going to continue to work this way, and it always will.

Picking the exact spot where these moves will happen is the tricky part. I said early in the day that “this appears to be the days low, but can we close positive”. I was not certain as there was still over 2 hours to go. For instance, if it became clear that we were going to close negative, then today’s low would have been cleared either into the close or tomorrow at the latest. If we had made this low with 30 minutes left in the day, how much would we have finished up today? Maybe 100, maybe less. Or maybe negative. When I say “the close is all that matters today”, this is what I mean. Huge moves either up or down will happen into the close. The market has always worked like this, but huge moves used to mean up 80 points. Now they mean up 800. Or down 800.

I was just watching Cramer and he is saying to use this strength to sell into because of the economy. True, i agree that this rally made zero logical sense on any level. But know this, there will be buyers above this low on the SP. We now have firm lows in the SP and the Dow. Therefore, if and when they clear, depending on when they clear (it isn’t that simple), then a complete market crash would be likely. I also think Cramer is very frustrated that the market skyrocketed on horrible data as he basically has to make trade calls on so called “fundamentals”. And fundamentals clearly say that not only should this rally not have happened, we should be testing the Dow low.

But it is what it is, and these huge “close day” moves are going to continue - in both directions. Pick the right day and you make a normal years return in 1 hour. Pick the wrong day and you will lose an entire years return in 1 hour.

Written by Tom@StockBlade.com · Filed Under General Investing/Trading Commentary 

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