It’s all well and good to say that this recent rally–or the preceding smackdown, for that matter–does not do justice to the facts on the table, that the markets are “behaving irrationally”. I have been saying this to myself and anyone else who will listen over and over, and it has been costing me time, heartache, and money. It is beside the point.

More importantly, to my mind, a market is a chaotic beast in the best of times. This is a key theme to me, and a reason for this blog–it’s something I am thinking through and will be writing about more, because I think making stories out of chaos is silly. Trend behavior, particularly on a short-term basis (from intraday to a few days) is more accurately described as a bunch of participants reading the same traces of that chaos and making similar bets on it. That’s not story, that’s consensus inference of story. Participants have read the same books and news, been educated in the same schools, and know the same history, so they are more likely to bet the same way than not, “bears” doing it half-empty while “bulls” do it half-full. This does not resolve chaos into pattern–this isn’t price discovery–though it can do a pretty good job of obscuring the chaos altogether.

I’m not saying I get something others don’t; I’m trying to be a good student of the hard data and, separately or together, the evidence around that data. I’m not a good day trader yet, and enjoy actually getting up from my computer from time to time during the trading day, so I’m looking for solid positions to hold for a bit or a while and pay off well; I need to believe in a discovered price beyond the noise, be it technical, fundamental, or otherwise.

Story Tide

As I try to improve my understanding of what’s happening, I spend a lot of time thinking about these things, and the way the “truer” longer-term story emerges relatively coherently out of the shorter-term chaos. Example: no one can argue, that the market’s story is up over the past few weeks. Did this unfold every single day the way a 28% rally “ought to” if it were orderly? Not a chance.

The key point of understanding for me these days is the points of inflection. Not catching tops and bottoms, but rather toning down the fundamentals thinker in me (very rational) so that I don’t anticipate and lose money (or time) to the shorter-term chaos. Fundamentals can’t be ignored forever; the key is to look for the moment at which they start to bleed through the irrationality and tame it.

So, how to grasp a shifting tide in irrationality? One of the things I’ve noticed in these last few months is the way news influences the market. Obviously, news matters, from events to earnings. But what interests me most are the moments when contrary news is brushed aside. It’s not as if all the news in January and February was bad, or all the news in March was excellent, but the market seemed to brush off the contrary indicator and press on in its shorter-term “trend” along the way.

You wouldn’t expect a rally that basically kicked off on Monday, March 9 to be announced by a headline like Slump Humbling Blue-Chip Stocks, but that was the Times headline on Friday, March 6. Of course, that was the infamous 666 day, too, and a lot of people were waiting for a bounce of that number as a fibonacci retracement.

Over that weekend, Obama signed the stem-cell ban reversal, which definitely goosed things, but I would argue that by Monday, when the tide turned quite decisively, the news tide had already shifted. In other words, an article talking about how blue-chips were humbled–a pretty depressing theme–no longer mattered. A clean bounce off a technical level, a little long-overdue scientific freedom, and we’re off to the races? I doubt it.

The key would be to work backwards, and figure out where that sentiment shifted. What seems to me to happen is that as a trend unfolds over a longer market timeframe–weeks, or months–reporters and analysts gradually shift from reporting it, to repeating it, to questioning it, to criticizing it, because they need story, day in and day out, so that you will listen to them. The market does not need you to listen in order to keep flopping around like a big clueless clod. Here’s the key: at some point, people get enough of the countertrend to get skeptical themselves, at which point no more news, however factual, in the current direction of the trend is believable. Especially when there are plenty of facts pointing the other way.

Can You Please Get to the Damn Point

Why am I rambling on and on about this? Not so you’ll buy my theory, but as a skeptic of whatever trend is going–I believe the S&P 500 average is a lousy measure of the current and future value of the U.S. economy on any given day–in order to trade well, I need to catch the inflection point. Back in March (or February, or January for that matter) I believed the downturn was exaggerated, given the facts on the table; the selloff was exceptional; the average had lost all meaning; the market was gonna snap back. Had I known that reaction-to-news sentiment had shifted, I might have caught it.

A month into this rally, I have been looking for that reaction-to-news shift. If the rally had unfolded with sturdier legs–fewer gaps, better pullbacks, some actual consolidation somewhere–I might have bought it as legit, and given it a few weeks to run. It never happened; even a few days in, I started to doubt; bad news kept coming, it was run over; good news created more and bigger gaps; reporters and analysts begin to question and criticize; more and more facts pointed to the rally being mistaken as to longer-term economic health; and still the moment didn’t come.

It may not have come yet.

No, I said, “CAN YOU GET TO THE DAMN POINT??!!??”

Here it is. I think we have our inflection point. Now of course, it’s earnings season, and the market has picked up a bit of an addiction, so if companies surprise to the upside I think we’ll still see strong up days, but I’m calling yesterday (or really, Thursday, with the WFC bluff and one of the biggest open gaps up yet after so much upness) as the last wholly embraced good news for a while.

What’s the tell? The Goldman story you’ve heard everywhere. Now granted, it’s complex–not purely good, since they are certainly up to some shenanigans, and may well not be able to repeat themselves–but an earnings beat like that should be very, very bullish, and hey, long as they’re bullish, let ’em raise a little capital! It’s to pay back the taxpayer, traders love that, puts off the tea party!

A lot of the “bad news” about Goldman’s “good news” came after the fact–after market open today, let’s say–but the goodness somehow just didn’t get through. Look for more good news to fall on deaf ears in coming days, and the market to become its own source of bad news thereafter. I believe the tide has shifted, that if you’re waiting to take profits on your longs you’re going to be waiting a long while, and that you might want to start looking at some short setups. (I was early. This is the problem I’m trying to correct.)

… I’ve been writing this off and on all day. Tonight, as if to confirm the tidal shift, we get this: Big Profits, Big Questions. What better theme confirmation do I need? Once the good news gets clawed back, the bad news is gonna run.

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