Here’s an insightful article by Adam Warner of Daily Options Report on the news and how it affects, or does not affect, stock prices. Does anyone know who the guys in the picture are?
Fish Food For Thought
Listen to TV for 10 minutes, or 10 seconds, and you would assume there is an incredibly simple and linear relationship between news and stock motion. It’s a dangerous notion, at least for the novice investor, who may pull the trigger needlessly.
But there must be some small relationship, no?
If you believe this study from New Scientist, it’s almost a non-existent correlation (hat tip Don Fishback).
Earlier this year, physicist Jean-Philippe Bouchaud and colleagues at Capital Fund Management in Paris studied the news feeds produced by Dow Jones and Reuters that provide real-time reports of items of potential interest to investors. Looking at more than 90,000 news items relevant to hundreds of stocks over a two-year period, they studied how “jumps” in stock prices – sudden, large movements – were linked to news items.
They weren’t. Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps. “Jumps seem to occur for no identifiable reason,” Bouchaud says
Don sums it up pretty well here.
Stocks fluctuate. Often times, they make price jumps based on no news. The greater the number of investors implementing the same strategy (i.e., the bigger the herd), the bigger the price fluctuations. Finally, the reasons given to you by the media for those fluctuations are often times based on lazy reporting and sloppy research whose sole purpose is the send you a message. It’s biased garbage passed on by a media too lazy to verify the claims being made.
Laziness would seem to be part of it. All too often it seems like if the market makes a move at 11 AM or whatever, someone appears to just go to a newswire and pick one story that came out right before that and just declares causality.
But there’s another factor at play too imho, Strict Observance of the Sacred Narrative. If the narrative is that the market moves inverse to oil (despite evidence that there is not a particularly strong correlation), then any time a market drop coincides with an oil pop, bam, we have our Market Driver of the Day. On those 50% of days this relationship does not hold, it’s simply not brought up, or brought up as some incredibly anomalous behavior like "OMG, the market is down despite lower oil).
And yes, bias gets in there too (I’m looking at you, Power Lunch). Early prediction; Assuming Obama gets a typical bounce out of the VP announcement, or convention, and the market happens to get plowed somewhere in that stretch, Dennis and MCC and Bill and Sue will know exactly why.
Reference:
Why economic theory is out of whack, by New Scientist, July 19, 2008. Excerpt: "WHEN you next sit down to watch the TV news, listen out for a telling phrase. At some point the newscaster will say something like: "The financial markets reacted to the report with a sharp fall…" Don’t believe a word of it. The markets rarely react to news in this way."… Need a subscription to New Scientist for full article.
