It is midweek and so far the market has not shown any inclination toward a major sell off, other than yesterday’s bungee jump from 143 up on the Dow to -12 in less than two minutes and then back up again to plus 130 in less than five minutes. If nothing else, that little heart stopper symbolizes the current market reality of back and forth. Unfortunately, “if nothing else” does not apply here. The market plunge yesterday is a warning to us all – in this day and age, the market is subject to manipulation and catastrophic error from technology.
I am not saying flee to the hills, but I am saying if you are getting into the game, be aware of this reality – robotic trading is a big part of the game and it is not yet ready for prime time. Computers are reactionary and this is dangerous. Just saying …
- I have been reading you for a while and one thing you say a lot is don’t blindly follow financial analysts. I am trying to learn how to “make my money work,” so I listen to CNBC and I read other financial news like Bloomberg and Forbes. Here is what I don’t get. On any given day, they will feature two or more well-known analysts that make a case for the market either heading up or down. I know you say don’t blindly follow either one, but one of them has to be right, so how do I know which person is right?
You are quite correct. One of them will be right, and you will know which if you have done your homework. All of these educated folks you see on TV and read in print can make a case for up or down, technically, fundamentally, historically, or nonsensically, but as you listen, you should have your own bias, your own sense of impending market direction (not for the day but for longer term).
If you study the macro-economic picture, learn how the market works, stay tuned to the global market news, and gather in a variety of thinking about the market, you will know who to listen to and who not to listen to. You will learn that just because some analyst runs a big hedge fund, is an economist, has a lot of years behind him/her, or is well regarded by the pundit class, it does not necessarily mean their take is the right take. These folks are wrong all the time and sometimes spectacularly so. The trick is to be able to say to yourself, he or she is wrong because of this data or that “under the radar” news. You won’t always be right, but you will have a better chance of being right than the 50-50 proposition offered up by the competing analysts.
Okay, so having said the above, here are some examples of data that speaks to market direction up and down.
- Boeing Co’s first-quarter earnings jumped nearly 20 percent, handily beating analysts’ estimates and showing little impact from the 787 Dreamliner problems.
- Ford Motor Co posted a higher-than-expected first-quarter profit on Wednesday as its North American unit posted its best quarter in more than a decade on the strength of new models.
The market likes the above more than it dislikes the data below. The reason is that market movement, ultimately, is all about earnings and it understands that for economic data to be meaningful, it has to demonstrate a trend over time. The current manufacturing data that shows a slowdown is not a trend, yet, but it can contribute to a negative short-term bias in the market.
- Orders for long-lasting manufactured goods recorded their biggest drop in seven months in March and a gauge of planned business spending rose only modestly, signs of a slowdown in economic activity.
The market also likes what the central banks around the world are doing to bolster growth, which leads to higher earnings, so the news below is important a positive bias in market movement.
- The European Central Bank is closer to lowering interest rates than at any time since it last cut them in July 2012 and is likely to shave a quarter-point off at its policy meeting next week.
Perhaps more important to the market than even the ECB intentions is any sign the consumer will spend more, since all of the global economies depend on consumer spending to grow.
- The sharp drop in gas prices over the last month or so could provide America’s economy with a much-needed jolt, putting money into consumers’ pockets just as the impact of federal spending cuts reverberates through the economy.
The above news speaks to optimism about consumer spending and it might be contributing to the only-slight reversal of yesterday’s big run up, along with the news about the ECB.
Ultimately, though, you will have to find opportunity in the market, and this is where analysts can play an important role, as there is no right or wrong. Rather than listen to those who boldly predict overall market movement, listen to those who analyze sectors, industries, and specific markets. Often, you will find those folks point out the under-the-radar news that can make you some money. For example, I recently wrote about DOW Chemical and solar shingles because I am tracking that industry. Now, one would think that the industry is moribund, given the mainstream take on the problems associated with it, but the truth is …
- Solar installations were up 76 percent last year compared with 2011, with 3.3 gigawatts installed across the country, according to the Solar Energy Industry Association. About 1.2 American households currently use solar energy, according to an annual report released by the trade group.
So, in the end, when you are comfortable with what you know and why you know it, you will not have this dilemma about who is right. You will learn to trust yourself. And, when you are right, be happy, and when you are not, accept it as just part of the game.
Trade in the day; Invest in your life …
