In most aspects of life, gaining information is helpful. Smart people learn how to learn, and use the skill in everyday life. There is a cruel twist of fate: When it comes to investing, a little knowledge can be a very dangerous thing!
If you read the headlines, you are assured of being at least one step behind. In the case of many headlines, it may even be a step backward.
Wednesday was a great case in point. Essentially, there was no fresh news except for an Italian bond auction (of short-term paper) that went very well, sending overseas markets and US stock index futures higher in pre-opening trading. Everyone knew that the more important test would come today, when Italy auctioned off longer maturities, stretching out to ten years.
This was the only fresh information, and I reported as much in my diary.
We then saw the same correlated trade that has been the staple of the past year: Lower Euro, higher dollar, lower commodities (oil and gold for sure), and lower stocks. Traders love simple heuristics, so it was "risk off."
Notice that there is no explanatory power involved in this statement. The Italian auction went well, and the initial reaction was positive for longer maturities. Any other stories about the ECB balance sheet were "old news" since that program has been sliced and diced for a few days.
Two Competing Headlines
Today's morning's papers will have many competing headlines offering explanations for Wednesday's trading.
Here are two choices, ironically from the same source:
or this one
The second headline is followed with this explanation: Investors get bearish on Wednesday despite an okay debt auction in Italy as eurozone fears never fail to haunt the market.
This is refreshing honesty from reporter Chao Deng, for whom I predict great things. She understands some key principles:
- Not every move needs an explanation;
- There are no delayed reactions;
- There is a never-ending quest to explain every move;
- Some moves are basically random and/or unexplainable.
This is consistent with her basic professionalism and her article in the Columbia Journalism Review. (I had a minor inspirational role in this, but it is 99% hers.) Here is a brief quote:
When reading a typical stock-market story, one that says something like, “Futures Gain Ahead of Obama Jobs Plan,” did you ever think to yourself: “How do we really know the market move had anything to do with the president’s jobs plan? Says who?”
I’m a markets reporter. It’s what I do.
Read the whole article. She explains the problem in interpreting the news.
The Sign of the Apocalypse in Financial News
To understand this, you need to get the context of Wednesday's trading.
Let us suppose that the Dow is down a buck thirty. There are only a few stocks fighting the market. The "B team" is on the job at CNBC. One of the pretty ladies has to point to each of the winners and say something. What should she say?
I was intrigued. As a long-time contributor to Seeking Alpha I was delighted to see that CNBC was showing some respect. I looked for the article and found something that was published the prior day. It was written by an anonymous author. I hope that CNBC continues to feature Seeking Alpha, but the process should be more disciplined.
I have no opinion on the merits of the article, but it is obvious that it had nothing to do with the stock strength Wednesday. My point is that even the biggest media sources will reach deep to find an explanation for an unusual stock move.
And finally -- if something good happens for the company at some point, there will be a technical analyst who will tell you that Wednesday's trading signaled something big.
I have been advocating the approach favored by NFL offensive coaches -- Take what the market is giving you!
For new accounts I spent Wednesday buying great dividend stocks at low prices and selling calls with inflated premiums. There are many such examples, but don't start with a list of the highest yields. Look for good yields, good earnings growth and reasonable payout ratios. I recently mentioned Abbot Labs (ABT), Johnson and Johnson (JNJ), Intel (INTC), and Microsoft (MSFT) as candidates. There were some excellent new choices Wednesday, but I am still shopping for clients. This is a happy hunting ground for yield-oriented investors.
Disclosure: Long all named stocks.