There is an old trading adage that says: “Nobody rings a bell at the bottom”. But there is another time tested trading rule that says: “Successful traders buy into bad news and sell into good news”. The second rule can be especially relevant when the bad news appears as a cover story of a major financial publication.
One of the best examples of the second rule in action was the BusinessWeek cover story “The Death of Equities”, which appeared in August 1979. At the time, the stock market had experienced serious losses and inflation appeared to be a major risk to the long term health of the US economy. The article stated several convincing reasons why double digit inflation would kill equity returns permanently.
Of course, we now know that the stock market staged a very strong comeback in the twenty years that followed. The BusinessWeek article missed the mark because it was a static analysis and assumed that nothing constructive would be done to address the problems. It turns out, the BusinessWeek article did a good job of “ringing the bell” to signal the stock market bottom.
In the last quarter of 2010, there was a sharp correction in municipal bond prices caused by several supply/demand factors:
- Municipal bond supply was greater than usual because legislative uncertainties caused municipalities to move up future issuance prior to year end. The expiration of the Build America Bond program was a major catalyst.
- Retail demand became weak because of uncertainties about the tax bill, expiration of the BAB program and increasing market volatility. The top tax bracket was not increased which added to price weakness.
Normally the above factors would be self correcting. Heavier bond issuance in the fourth quarter has lead to lighter new issuance in the first quarter. But there has
