Tuesday night we caught a few minutes (i.e., two minutes) of Fast Money, during which someone said something* about the rising price of Toll Brothers (NYSE:TOL) suggesting that investors must think the fundamentals in the housing market have bottomed (or, in that infinitely plastic formulation, are in the process of bottoming, whatever that means).
Now that may well be true, but the premise sent a tingle through our don't-trust-the-unreconstructed-fundamentalists.
What a rising stock price indicates, it turns out, is that a security's buyers are marginally more enthusiastic than its sellers. End of story. As in Keynes's famous metaphor of the beauty contest, the determinant of stock prices isn't so much what Joe and Jane Analyst or Sam and Sarah Homegamer think a stock is worth. It's what they think others will think it's worth at some (often very vague, if even conceived of at all) future date. Which leads us to a discussion of momentum, reversals, perceptions of what's "cheap" and "expensive," and, as ever, good ol' randomness. (On the topic of cheap versus expensive, see this item from Barry Ritholtz.)
This is not an entirely nihilist view of market mechanisms. The argument here isn't that fundamentals don't matter. They can matter very much, and in some extremely basic way, they always do. But it's not the present tense of the fundamentals or their objective reality (which can only be known in retrospect, if then) that matter. It's traders' and investors' perceptions of how those fundamentals will be perceived by other market participants. This discussion can quickly push off in the direction of infinite regress and "turtles all the way down."
Anyway, back to where we began: Recent buyers of Toll Brothers stock do not necessarily think that the fundamentals in the housing market have bottomed. They might think--and we can't even be sure of this, but it's more plausible and probably much more accurate--that Toll Brothers and other housing stocks have sold off in a big, big way, somehow gotten cheap, are now (look at the charts!) rising again, and offer some semblance of "value" in a market that lacks conviction and direction. They could well be--and, again, almost certainly are--buying housing stocks ahead of the bottom. But then that's what people mean when they characterize the stock market as a leading indicator.
* Which reminds us of our favorite item at our favorite seller of fun things in Monterey, CA. It's a post-it-size notepad with the image of a prototypical 1950s secretary. Smiling, she says "Somebody called. About something." That's great stuff. (Note to clients: We try to take better messages than that.)