Jun 23 2009
The Market Already Knows
There was a recent post by Michael Kahn on his Behind the Headlines blog which he titled Trade the News? I Don’t Think So. The basic point of the piece is that what you read or hear in the media is more or less meaningless in terms of what the market is doing in the present. This is a subject that came up several times in the presentations I did that Traders Expo earlier this month. Michael is exactly right that inexperienced traders and investors expect current news, like the latest earnings headline for a stock, to drive prices. The fact of the matter, though, is that the market is a discounting mechanism. It’s looking to the future and positioning itself for what’s to come.
Micheal attempts to drive home his point with this example of how things already known were driving the market. At least that’s what I think he was trying to do.
Why did the stock market peak in October 2007. The fundamentals looked great. Bears Stearns was still in business. Subprime had not exploded. There was not such thing as TARP and Bernie Madoff was just the guy who owned the market maker that kept screwing me on executions.
I think maybe based on a purely stock market view he might be right that things were looking fine from a fundamental perspective in the Fall of 2007. If, however, you were looking at what was happening in the money, credit and currency markets you would have known all was not well. They were all roiling in the Summer, well before the stock market peaked.
In fact, I can remember the bond market guys wondering aloud what the heck the stock traders were doing continuing to buy stocks when it was so clear to them that something wicked this way was coming. And not all stock traders were oblivious either. If you look at a chart of the financials you’ll see they were already turned down well before the general market did.
Of course the questions these days are whether financials will be the sector to lead the market out. Some folks think that must be the case. I’m not in that camp. I think while they definitely did get oversold, they are also extremely diluted due to all the new capital and the earnings environment is going to be more challenging. That to me doesn’t add up to strong EPS growth, which in the end is the requirement for a group to become a market leader.
Here are some other posts which might interest you:
