Look Out Below, Euro Stress Test Version
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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.
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Previously:
Lose the News (06/16/05)
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July 18th, 2011 at 7:38 am
And as this post suggests, I have no idea what is causing the day to day action — regardless, its mostly noise
July 18th, 2011 at 8:35 am
Still think Brian Williams is missing out by not having you on as his “go-to” expert on the economy.
July 18th, 2011 at 8:51 am
bing bing bing and bing
Americas Issues
. disfunctional government
. ratio of debt to gdp
. baby boomers retire’g
. and non-export yuppy mussy jobs drawing on world resources
100 year pay down to near balanced budgets pay as you go throughout all spectrums
5 generations carry the burden
and before submit ..
Road, Water & Electrical distribution/generation PROJECTS without a plan to turn the “yuppy mussy jobs” around is not investing for our future .. we’ve gotta EXPORT more than we import …. actually for the worlds benefit .. all world economies MUST balance …. WS won’t like the balance tho .. churn baby churn
July 18th, 2011 at 8:53 am
Media foment “Crisis!!!!” to attract attention. Anyone watch the Weather Channel lately? It’s all tornados, all the time (except when it’s hurricanes). And witness the apocalyptic “Carmageddon” stories about the recent LA freeway closure. That turned out to be a non-event as well. We are poorly served by these hucksters.
July 18th, 2011 at 8:54 am
Media commentators are paid to comment.
No one seems to care whether what they say makes any sense.
Regards
July 18th, 2011 at 8:57 am
Speaking of correlations, anyone else notice the one between low sovereign interest rates and successful national women’s soccer teams? That seems a surefire winner, and I’ve got my programmers adjusting my algos even as I type.
July 18th, 2011 at 9:02 am
I don’t know if it’s correlation, causation, or if Ms. O’Leary’s cow got loose, again, but the smell of BS in the air surrounding the markets is ubiquitous and overwhelming. They say that if you breathe it long enough, you don’t smell it anymore. That don’t make it healthy.
Things are fixin’ to get interesting.
July 18th, 2011 at 9:28 am
Excellent observations. It seems as though the more media, the more screamer correlations. Is that a correlation?
July 18th, 2011 at 9:48 am
That is why looking at the economic data and news about trends in economic data (not opinions about economic data) and market internals is relevant.
I’d like to point to this one piece of news from the Telegraph to being relevant (h/t Credit Writedowns):
http://www.telegraph.co.uk/finance/economics/8636155/Italy-money-supply-plunge-flashes-red-warning-signals.html
And here:
http://thetailchaser.blogspot.com/2011/07/will-funding-issues-bring-europe.html
July 18th, 2011 at 11:55 am
Whatever happened to the Eastern European countries? Or are the amounts so much smaller that the problem can be ignored?
July 18th, 2011 at 12:29 pm
well i agree that most ex post daily real side explanations are useless.
but several of those are perfectly good partial explanations for the last 6 weeks
July 18th, 2011 at 3:18 pm
Barry the best one liner on stock market investing
http://www.readtheticker.com/Pages/Blog1.aspx?65tf=290_barry-ritholtz-one-liner-on-how-to-approach-the-stock-market-2011-07
July 18th, 2011 at 8:14 pm
In today’s financial world, it should pays to be cynical, and it may be wise to believe that most market commentary is guided by greed and lack of ethics as the rest of that world is.