Traders and analysts always sound so wise when they give a list of reasons why the market went up, down, sideways, or all three. There isn’t even a moment of hesitation when you ask. They tell you like it’s the most obvious thing in the world, something “everyone knows.”
The problem is, most of the time it’s probably not really true.
Case in point: commentary this morning about why Dow and S and P futures and FTSE and DAX indexes were climbing before the U.S. jobs report came out. According to the smart folks talking, the markets were expecting the jobs report to be bad, really bad, and probably worse that expected.Â
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That made a majority of people in the market happier, and willing to drive stock and commodity prices up, because bad economic news was likely to make the more-Democratic U.S. government-in-waiting want to throw a bunch of cash at U.S. citizens, and more likely to make the U.S. Federal Reserve Bank lower interest rates.
OK. Let me get the logic straight. The market was moving up because bad news was coming. How is that different from the times when bad news came, was expected, and apparently drove stocks down? And why is it such a good thing that the U.S. government and Fed will have to continue to take emergency measures when there’s actually a reason for them to do them?
It’s like the situation with Obama’s victory this week. On Tuesday stocks rallied because Obama was about to get elected. On Wednesday and Thursday they plunged because Obama was elected.
Huh?
It’s the kind of thinking that created the desire for and acceptance of technical analysis by a substantial minority of people in the markets, beginning with Japanese rice growers in the middle ages, developed by Charles Dow (of Dow Jones fame), and pushed to complex extremes in recent years by battalions of mathematicians and statisticians looking for jobs outside the ivory tower of academe.
Technical analysis doesn’t attempt to explain why things moved up, down or sideways, but tries to spot repeating patterns and anticipate changes so that traders can get on the “right side” of whatever’s coming. Technical analysis can sound bizarre, with its arcane language and weird terms for chart patterns. But sometimes the humility of the technical analyst discussing a “continuation diamond” can seem like sweet music compared to the blathertudes about the effect of Obama, jobs reports, or missed earnings goals.Â
It may be more fun to give Barack Obama credit/blame for what the market did this week than consider it a response to “dark cloud cover” on a candlestick chart, but the latter explanation is probably as valid as the latter.
