Monday, April 13, 2009

It's Not the News, It's How the Market Reacts to the News

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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At the moment, world stock markets are acting more like bull markets than bear markets. In a bear market all news is bad and in a bull market all news is good. There is still plenty of really bad news out there about the economy and corporate earnings - and the media is flooding the airwaves and using a lot of ink on stories of bad news, more bad news and still more bad news. The average investor will act like a deer caught in the headlights frozen in inaction. Meanwhile stock prices keep going up and up because professional traders are buying. What the market does is the only thing you should pay attention to. If any of the reporters writing these stories actually knew anything about making money in the stock market, they would be successful traders making a hundred times more money than they do as reporters.

Last week Alcoa (AA) offered a perfect example of the bull market reaction to news. Earnings were not just bad as everyone thought they would be, but were even worse than expected by 3 to 5 cents (depending on which analyst survey you looked at). The stock actually opened up the next morning and then settled down for a small loss on the day. I had sold out my position (purchased off the bottom) in anticipation the earnings would be worse than expected. However, since the market obviously didn't care about that, I bought the stock right back the next day (at the market, I don't take the risk of not getting a good bargain by setting limit orders). Alcoa then had a big rally on Thursday. When a stock goes up like this on bad news, it indicates all the bad news has already been priced in. When that happens the price can only go up. You didn't read about that in the mainstream press however. All you saw was negative coverage of how poor the aluminum business was last quarter even though the market couldn't care less what happened last quarter.

As we detailed in last weeks meeting, the press has been not just irrelevant when it comes to the coverage of the oil market, but out and out misleading about the actual state of affairs. The oil bears have managed to drive the price of light sweet crude below the 50.50 breakout point 3 times so far. I have bought more oil related stocks at each point (Recently I started purchasing drillers which are usually the last to rally). Nymex oil closed the trading week at $52.24 on Thursday. The media is doing its best again today to highlight the negative view on oil. The IEA, International Energy Agency, is now predicting that global oil demand will fall 2.4 million barrels a day this year. Media stories didn't mention any statements from the agency concerning predictions on supply (which is falling rapidly). Meanwhile Iran's oil minister, a source that would not have any credibility with U.S. readers, released a statement that the price of oil should go to $75 to $80 a barrel and the media highlighted this. In response, renowned oil "expert" Victor Shum, a source that should have no credibility with U.S. readers, said, "nobody, even in OPEC, expects the price [of oil] to get to $75 this year". Obviously, Mr Shum doesn't follow the New York Investing meetup. If he did, he might improve the accuracy of his forecasts.

People don't make money in the stock market because they focus on the irrelevant - and the mainstream media is more than willing to help you do this. Pay attention to what the market is actually doing if you goal is to make money investing. Then you need to take action. If a consumer goes shopping and sees an incredible bargain at 90% off, they don't usually say I'll come back next week to see if its 95% off or I'll come back and get it in a couple of hours when I'm done with my shopping (lots of luck that it will still be there). People do this with stocks all the time though and this is one of the major reasons the average person has trouble making money investing.

NEXT: Rallies Make You Rich, No Matter What the Type

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

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