It seems that a lot of traders and investors miss the point when talking about the markets. Traders often make scornful comments about information which holds significance for value investors, such as fundamentals, and likewise long term investors make snide comments about the foolishness of fast trading. Short sellers seem to live for finding troubled stocks, while these stocks’ shareholders sometimes accuse those same short sellers of causing the problems with the stocks. Options and futures traders sometimes have themselves so hedged, straddled and locked in, over and out, that they can’t explain what side of a trade their on. Add the technical statistical gals and guys reading their Fibinaccis and their stochastics, throw in a few day traders who buy and sell in a Wall Street nanosecond by the seat of their pants, and you have a lot of what amounts to market noise, if not babble.
When markets are down—and they are still down—the major indices such as the S&P 500, the NASDAQ, and most of the rest, including the supposedly outmoded yet sometimes venerated Dow, it might be important to look at whether there is anything worth listening to in the noise.
While all the noise, shouting, and activity appears to be sometimes contradictory and sometimes completely confusing, it’s worth listening to, sifting through, and carefully finding out a few things. What seems to be noise are actually the actions, comments and thoughts of all stripes of participants who make up the market’s activity. And it merits paying attention to. Of course, if you’re Warren Buffett, you can say flip things like, “There is no such thing as a stock market.” But if you’re a value investor living in Des Moines, Iowa, with a mortgage on your house, worrying about sending your two kids to college and scraping up free cash to invest in the market, you’d better know there’s a stock market. It’s different for Buffett; he buys companies and moves markets. You can’t.
Remember that the markets are comprised of everybody who participates. It doesn’t mean you have to trade or invest the way they do, but it’s important to have some understanding of what’s going on, of what others are doing, because markets are not only dynamic, but heavily interconnected. When an institution trades a large block of stock, it moves the market a bit. When several do, the markets may lurch. When short sellers slam a stock, this has an impact, too. If you own that stock, even though short selling may be abhorrent or immoral to you, you need to understand what those short sellers are doing and how that affects your trade or investment. To do otherwise, to blithely say, “that doesn’t affect me,” is like being in the middle of a football game but not paying attention to the 350 pound lineman charging right at you. It does affect you.
One thing professionals try to do is read the market. They are not trying to read tea leaves or do anything mystical, and in most cases it is not an ego trip. It is purely pragmatic, often defensive. Smart professionals know damaging losses are even more devastating than positive trades, stock picks or investments are beneficial. So they all are wary, they all don’t want to be caught on the wrong side of a trade or have a long position in some stock that’s just getting murdered, for whatever reason. Retail investors—and even retail traders, should do well to adopt this attitude. Save the bravado for someplace else.
So what are recent developments telling us about stocks? Well, this credit thing hasn’t worked its way fully through the system yet. More banks are reporting surprises, which is today’s parlance for write downs. Institutions are wary of making big bets on stocks. Earnings are still flattening out as all this tangible negativity continues to work through the financial system. Downgrades of earnings and stocks are meaningful, they show the direction is, if not still down, not yet up. Charts and fundamentals are often saying virtually the same thing. Experienced traders add their wary, intuitive wisdom that says we’re going to re-test the lows. These is a classic and historically true market pattern, though it may vary in particular behavior, its seldom untrue. Don’t fight the markets.
