Good Luck Interpreting This Market

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 |  Includes: DIA, IVV, JPM, QQQ, SPY, VOO
by: Jeff Miller

Intelligent people want to make sense of the world around them, no matter how confused it may seem. Everything must have an explanation. When the market rallies by more than 300 points after weeks of persistent selling, well... There must be a reason!

Reuters offers this explanation:

Hopes for another Fed rescue drive 3 percent rally

The Wall Street Journal asserts:

Stocks Jump on Hopes for Fed Action

The New York Times had a benign headline, but offered this lede:

After weeks of uncertainty, the markets finally seemed to seize the day.

Stock indexes powered ahead on Tuesday as investors sought buying opportunities on cheap stocks as they bet that weak economic data would support the possibility of further stimulus from the Federal Reserve. It was at the Fed’s annual symposium in Jackson Hole, Wyo., last year that Ben S. Bernanke, the Fed chairman, signaled further stimulus in light of a similar slowdown of the American economy.

Kwame Holman, who gives the official summary on the PBS Newshour stated the following:

Wall Street shot back up today amid speculation that the Federal Reserve might try a new stimulus program after all.

Wow! Four powerful opinions --- all wrong.

Reminiscing

One of my favorite books as a poli sci student was Timothy Crouse's, The Boys on the Bus. The book covered many great themes about campaign coverage in the 70s. Much has changed, of course, since reporters can now file stories by WiFi at any time. In those days they often filed much of the story in advance, but then had to find the lede (called the "lead" in those days).

A crucial point was that anyone who was out of step with the consensus was open to criticism. Everyone looked to AP's Pultizer Prize winning Walter Mears. Crouse wrote:

"At what he does, Mears is the best in the goddam world," Said a colleague who writes very non-AP features. "he can get out a coherent story with the right point on top in a minute and thirty seconds, left-handed. It's like a parlor trick, but that's what we wants to do and he does it.....He watches some goddam event for a half hour and he understands the most important thing that happened --- that happened in public, I mean.

Crouse relates several amusing stories where Mears changed his lead and competitors were called on the carpet for having the "wrong lead."

The description of this is so powerful, that I remembered it after many years.

There is a powerful force, driving journalists to a consensus interpretation of events.

The Challenge for Investors

How can you know what to watch for, if your understanding of events is flawed? Without the right analytical framework, you have no hope of interpreting the news and daily market fluctuations.

My own interpretation of today's action is quite different from what you are reading in the news. There is an oversold condition with many looking for a chance to buy. The news from Europe was encouraging. Even before the opening there was a buzz about reports from China being "less bad" than expected. Gold (a popular measure of fear) was moving lower. European financials were moving higher.

Check out Briefing.com for a source that shares this more sophisticated interpretation.

If you were looking for an entry point, some would see signs from this news. If you were short, you might think about covering -- at least for a few days.

The idea that weak data -- pretty much in line with expectations -- created a sudden change in expectations about Fed policy is just silly.

As I noted in my weekly update, there should be little expectation for a major change from the Fed. I will further explain my reasons before the speech.

Investment Actions

There are many attractive financial and tech stocks. I am still buying JP Morgan (NYSE:JPM), highlighted here. There is a lot of debate about financial stocks, and JPM is the leader. I also am buying Oracle (NYSE:ORCL). In mentioning this, I want to highlight the work of Eddy Elfenbein. If you wanted to look at one chart to understand what is going on, this would be a great candidate. Eddy is calm, disciplined, and has a great sense of humor. I love his twitter feed @EddyElfenbein.

I have five different investment programs, and four of them are pretty conservative right now. My most successful system (judged in the long term) has a portfolio of stocks like those in Eddy's chart. There is a time to focus on specific companies.

A Final Word

I am a member of an online discussion group that engages seriously and vigorously in important topics. The role of Twitter is a current subject, with widely varying opinions.

The discussion has caused me to wonder about something. Today's journalists have a virtual "bus" because of Twitter. They reach the same lede, partly because they know what everyone else is thinking.

This is safe, but it is really helpful?