"And then all of a sudden…"

“It was all good just a week ago.”
– Jay-Z

There we were bickering over Groupon’s valuation and cheering on Apple’s latest earnings call when all of a sudden…

If traders and investors take a single thing away from the events of August 2011, it should be this:

It is not enough to know what the news is, you must also know when the news going to matter.

When markets react “all of a sudden” to news that’s been out there for a long time, there is a tendency for non-market people to throw their hands up and say “You see!  Nobody knows anything!  It’s all a game/joke/casino/farce etc!”  This reaction is understandable.

In Barry Ritholtz‘s Washington Post column this week, he looks at the mystery of why all of a sudden, things we had been aware of for months (years) all seemingly hit the fan at once this week as the Dow dropped 1000 points…

Why have markets suddenly turned so skittish? It is not as if any of the usual suspects have been unknowns. The problems in Europe were well understood; the PIIG countries (Portugal, Italy, Ireland, Greece) are just as insolvent today as they were a week, a month or a year ago. The end of QE2 was not sprung on anyone. The Fed’s liquidity program was scheduled to end June 30, a date markets knew many months ago. And no one on Wall Street really believed Congress would allow the debt ceiling to cause a U.S. default.

All of the above are after-the-fact rationales — excuses for what pundits cannot easily explain.

I know tons of worldly, knowledgeable folks who know everything there is to know about the economic news of the day – and they were murdered this week, just absolutely blown apart.  The reason is that they know What the news is, just not When that news will matter.

Earnings news matters immediately, the reaction time for a given stock can be measured in fractions of a second

Federal Reserve rate policy news matters immediately but also beforehand – there is the kneejerk reaction away from whichever direction the market was headed, then the kneejerk to the kneejerk as the accompanying statement from the FOMC is parsed, think about the crowd watching a tennis match for a reference point.

Economic news, however, is extremely tricky to game.  Sure, markets will move intraday on things like a BLS jobs release or a GDP report, but over the long haul, it is helpful to know whether you’re in a Bad News is Good environment or a Bad News is Bad environment.

In a Bad News is Good environment, the hope is that weak economic data points will mean continued accommodation from central bankers and policy makers.

In a Bad News is Bad environment, negative news begins to be treated as actually being negative – this occurs when the reality dawns on people that everything that can be done is now being done or has already been tried.

But nobody ever waves a flag saying “Okay, bad news will be treated badly from now on!”

We ignored an ominous undercurrent of negative newsflow for more than two years for the most part with only a handful of hiccups.  Europe has sucked forever as has our employment situation and it’s not like our debt pile of $14 trillion just magically appeared overnight.  So the only question is, how would an investor or a trader know that all of a sudden, these horrid ongoing news stories were going to start to matter?

The answer, as always, was in the tape and the technicals.  Jesse Livermore knew this and it took me the better part of 14 years to learn and respect this.

Old school tape-reading is a forgotten art, it is hardly taught by anyone anymore.  My friends Mike and Steve at SMB Capital know more about reading the tape than anyone else I know of, here’s their explanation of this art form:

When you read the tape you can determine whether a stock will go up or down from its present price by looking strictly at the bids, the offers, and the prints. This ability to read the next move in a stock is often absent from your charts, a lagging indicator.

This is basic supply/demand stuff – money flow.  And while it is predominantly useful to the intraday trader, the way a tape reads over a few days can send bigger signals for bigger moves.  I am admittedly, at best, a passable tape reader – I was much better at it in my brokerage days than I am now as a financial advisor as there is a different set of skills I’ve had to focus on these days. Even with my fading abilities in this area, it became apparent for a string of days that the tape had changed; bids were coming in reluctantly if at all during the last week of July and disappearing more quickly than usual.

In addition to tape-reading, a basic understanding of technicals goes a long way.  Our sell call this past Monday was informed by many economic inputs, that morning’s ISM numbers being just the latest in a series of deteriorating data points.  But the chart-wrecking 200-point plus Dow reversal was the straw that broke the camel’s back.  Sell.  The fact that all major indexes were ripping through major, longer-term support lines?  Sell even more.  I’m not a CMT or a Japanese Candlestick fetishist, but this was all right in your face so long as your face wasn’t buried in a piece of sell-side research from Merrill Lynch.

The bottom line is that being smart and informed isn’t enough.  Most of my journalist and analyst friends are brilliant, I am constantly in awe of their recall and their ability to contextualize the constant flow of information.  But having all that knowledge is far different than applying it to make (or save) money in the markets.

The ability to read the tape along with a basic understanding of technicals will help you put all that news and information you have to actual use.

 

 

 

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Lesbian Clit Stimulator commented on Jul 06

    Lesbian Clit Stimulator

    […]we prefer to honor quite a few other web internet sites around the web, even when they aren’t linked to us, by linking to them. Underneath are some webpages worth checking out[…]

  2. beginners bdsm commented on Jul 06

    beginners bdsm

    […]check below, are some entirely unrelated websites to ours, however, they are most trustworthy sources that we use[…]

  3. 12 inch double sided dildo commented on Jul 06

    12 inch double sided dildo

    […]the time to study or check out the content or web-sites we’ve linked to below the[…]

  4. apps for pc download commented on Jul 07

    apps for pc download

    […]Here is a good Weblog You might Discover Exciting that we Encourage You[…]

  5. phenq commented on Jul 07

    phenq

    […]always a significant fan of linking to bloggers that I really like but do not get a whole lot of link adore from[…]

  6. hummer hoverboard commented on Jul 07

    hummer hoverboard

    […]The facts mentioned inside the post are a number of the most beneficial accessible […]

  7. free app for pc commented on Jul 07

    free app for pc

    […]Wonderful story, reckoned we could combine a few unrelated information, nonetheless seriously worth taking a look, whoa did 1 understand about Mid East has got much more problerms at the same time […]

  8. free download for pc windows commented on Jul 07

    free download for pc windows

    […]although websites we backlink to beneath are considerably not associated to ours, we really feel they are actually worth a go by, so have a look[…]

  9. apps download for windows 7 commented on Jul 08

    apps download for windows 7

    […]one of our guests not long ago proposed the following website[…]

  10. خرید اکانت vpn commented on Jul 08

    vpn ایفون

    Hello there! Do you know if they make any plugins to support with Search engine marketing? I’m striving to get my site to rank for some qualified search phrases but I’m not looking at extremely great gains. If you know of any you should share. Many tha…

  11. thin cylinder theory of arch dam commented on Jul 08

    thin cylinder theory of arch dam

    […]here are some links to sites that we link to mainly because we think they may be worth visiting[…]

  12. seo service commented on Jul 09

    seo service

    […]one of our guests not too long ago proposed the following website[…]

  13. Cyberharassment commented on Jul 09

    Cyberharassment

    […]always a big fan of linking to bloggers that I appreciate but do not get quite a bit of link appreciate from[…]