Imagine you don't know anything about the stock market. Let's say you're an alien sent to this planet to study collective human behavior. Your task: the stock market. Millions of humans participate in it. Anything we can learn by watching them invest their money into a collective pot?
Your first observation: Most humans get their information about the stock market from the mainstream news media. Second observation: Regardless of what financial news outlet you turn to -- CNBC; The Wall Street Journal; Google Finance, etc. -- everyone seems to be glued to the news headlines, trying to interpret what it means for the market's turns and trends.
So you, the alien, decide to do the same.
On the morning of Wednesday, August 26, you sit down in front of your super-advanced alien computer and check the economic news release calendar for the United States. Aha! 8:30 AM -- Durable Goods Orders report; 10 AM -- New Home Sales report. Should be an interesting day!
Although human economists were looking for a 3% rise in the Durable Goods Orders, the 8:30 AM report comes in 4.9% higher -- biggest rise in two years! Excited, you expect the stock market to open strong.
But at 9:30 AM the DJIA opens lower.
You scratch your pointy green head and check the headlines for an explanation. "US Stocks Slip Despite Upbeat Durable Goods Data," says one on Marketwatch.com. "Despite upbeat data, hmm," you say to yourself. "I thought stocks always went up when the news was good? Must be an exception of some sort, never mind. Let's keep watching."
At 10 AM, New Home Sales report brings more good news: Single-family home sales across the U.S. also beat economists' estimates and jumped almost 10% -- a huge rise, and for the fourth month in a row! That should get those stocks going!
But after the report, the Dow still stays below the previous day's close. Then finally, lazily, it starts to move higher. By 10:30 AM, the index is up around 20 points.
"20 points?" you think. "It should be 200 points higher by now! How much more positive can economic numbers get in a single day? What does it take?"
But you're a professional researcher, so you calm yourself down and keep observing. Alas, it only gets worse. Whatever measly gains the market did see after the 10 AM report quickly fizzle out, leaving you with this picture for the entire day:
You feel disappointed in the humans' assumption about news having a profound influence on the stock market. And you make another important discovery along the way. Whichever direction the stock market goes, there is a news story "explaining" the move. Stocks move up? "Strong durable goods; rising home sales"! Stocks move down? Well, it's "a waiting game"; "investors are taking a pause."
"But that's not scientific at all," you think. "They only chase the market with those headlines and 'explain' each move after it's already happened. Their economists insist there is predictive value in those reports, but where is it? Can't they see they are deluding themselves?"
At the end of the day, with the Dow closing up 4 points ("Whoo-hoo! Strong durable goods!"), you sit down to write your daily report.
"My initial findings show that despite their rational capacity, the absolute majority of human stock market investors exhibit strong herding tendencies and a false understanding of causality. They are absolutely convinced that the stock market reacts negatively to bad economic news and positively to good news, but preliminary data clearly do not support either premise. More study is needed."
"If I invested like that on my planet," you think to yourself as your super-advanced alien bed cuddles you to sleep, "I'd be broke long time ago." The lights go dark inside the ship and you fall asleep. Tomorrow is another day of research.
Do your own "research" of the markets' upcoming twists and turns by reading EWI's latest forecasts today, risk-free.