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Paulo Santos
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I am a Portuguese independent trader, analyst and algorithmic trading expert, having worked for both sell side (brokerage) and buy side (fund management) institutions. I've been trading professionally for about 16 years and also launched www.thinkfn.com in 2004. Thinkfn (Think Finance) carries... More
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  • News Can Mean Something And Its Opposite 2 comments
    May 23, 2013 9:50 AM | about stocks: AAPL, AMZN, FXY, UUP

    Sometimes you're expecting a given piece of news, or interpreting a piece of news that just came out. And amazingly, the market does the precise contrary of what you'd expect it to do under the circumstances.

    Putting aside the very usual fact that markets quite often turn on news events (the so-called "buy the rumor, sell the news"), there is also something else at work here.

    Put simply, the market can quite often interpret the same piece of news on completely contradictory ways, for no particular reason.

    Take for instance the Japanese Yen (NYSEARCA:FXY) and the U.S. Dollar (NYSEARCA:UUP)

    In the past 6 months, the Yen is down heavily. The reason? The Bank of Japan is printing left and right, and as everybody knows, printing money leads to currency weakness. It's thus no surprise that the Yen is imploding.

    But wait. The Federal Reserve is doing exactly the same! And guess what, in the last 6 months the U.S. Dollar is up strongly, not down. On precisely the same kind of policy, to boot. So why is currency printing bad for the Yen but good for the Dollar? Well, the rationalization would be that the printing in the U.S. is making the economy better, so the Dollar strengthens. Obviously, any kind of rationalization is just that … a rationalization. The true driver is just one of supply and demand, and on the same piece of news people have decided to sell Yen, but to buy Dollars.

    This even applies to stocks

    All along its ascent, Apple (NASDAQ:AAPL) carried low earnings multiples. Why? Because with each conquest, the fear was that it would be the last conquest, that the summit had been reached. And when the summit was indeed reached (at least for a while), then Apple got punished yet again.

    At the same time, each time Amazon.com (NASDAQ:AMZN) presented horrid earnings -- and this repeated itself quarter after quarter for two and a half years - the posture was different. The posture was always "well, yes, these were horrid, but they're investing and soon they'll be producing huge earnings!". Never mind that just getting to where Amazon.com was during 2010 would already be like climbing the Everest.

    Not just a game of expectations

    The first thing someone would say here was that it's all a game of expectations. That, too, wouldn't quite capture it. Amazon.com's expectations always went down along with earnings. Apple's mostly went up. Plus nobody really believes the Federal Reserve is doing anything to build a sustainable future, or Bank of Japan for that matter (but at least there the currency implodes).

    Demand and supply, allocation

    Whatever the reasons, it all comes down to demand and supply for the assets. That's pretty obvious. But what dictates demand and supply is the allocation that all investors want to any given asset. That allocation can be influenced by fundamental factors where news would be relevant, but it can also be influenced by what investors think other investors will do in those assets.

    This perhaps gives credence to the phrase "you have nothing to fear but fear itself". The reason why the Yen drops is because everybody dumps it. The reason why the USD climbs is because people don't dump it, at least not yet. At least until they fear others might dump it themselves.

    In the markets, this applies to almost everything and can explain why everything is dandy regarding Greek and Portuguese debt one day, and nobody wants to touch it the next day. The reasons not to hold it -- the news saying one ought not to hold it - were certainly well-known years ago. But as long as others hold it, nobody sees a problem in doing likewise.

    This is perhaps something which should be kept in mind when holding, say, U.S. Dollars or Amazon.com stock. The reasons not to hold those are well-known now, but since others are still holding, nobody has a problem with them. This won't last forever.

    Conclusion

    While taking place, many news can be used by the market to run either way. Indeed, the same piece of news can be used to run both up and down. But at some point, if a given development has deep fundamental implications, it usually ends up having an effect. This effect usually comes when those, sedated by the others' willingness to hold a given asset, see such willingness melting away.

    Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: market-outlook Stocks: AAPL, AMZN, FXY, UUP
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Comments (2)
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  • captiankirkoptions
    , contributor
    Comments (198) | Send Message
     
    I agree sometimes mood and sentiment reflect greatly on a stocks valuation. I would rather trust logic and reality when I can find it. Sometimes real truth behind a situation is very hard to find until it is over, and even then hard to justify. The tech bubble was a perfect example of sentiment and mood driving up valuations to unrealistic levels.
    23 May 2013, 08:45 PM Reply Like
  • sethmcs
    , contributor
    Comments (3284) | Send Message
     
    The best example of this is Wednesday SPLS one of my holdings reported a terrible quarter -- it went up. Everything else I held went down. I took a beating as bad as I did in the days of the financial crisis. As punishment, I watched level II quotes all afternoon. Watching a slow moving train wreck. When it was over I scratched my head. The reality is this: My trading cannot move the market but that can be an advantage. I only own stocks that I believe are undervalued if the market does not agree with me today it very well might tomorrow. Do not ever panic when the tape does not go your way. Excessive trading (especially in panic) results in being whipsawed and making unrealized losses into real losses.
    23 May 2013, 10:39 PM Reply Like
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