How 'Startling Unexpected Headlines' Can Cost You BIG
See recent and past evidence that news and the stock market's trend are uncorrelated
by Bob Stokes
Updated: May 15, 2017
A chief investment officer just told USA Today, "Listening to the 6 o'clock news gets investors off track." Find out why he made that statement. Plus, see what a "news-driven" and rational-reaction graph of stock prices would look like. (Hint: It's nothing you'd ever see in real life.)
[Editor's Note: The text version of the story is below.]
Apparently, most financial news writers didn't "get the memo":
[T]he market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life.
The path of prices is not a product of news.
That's from Frost & Prechter's Wall Street classic, Elliott Wave Principle.
Yet, financial headlines continue to link the day's news with the stock market's action. Unfortunately, investors who act on such headlines are usually the worse off for it.
Look at this May 12 USA Today graph:
Unsettling news that was supposed to derail stocks -- and could have spooked investors into selling -- did not cause selloffs.
The market was supposed to crash after Brexit last June. It didn't. It was supposed to take a big hit when President Trump was elected. It didn't. It was supposed to crater when the Fed started raising rates. It didn't.
Instead, stocks kept going up. The Dow Jones industrial average is 14% higher than it was on the day Trump won the White House vote, despite predictions that his win and unpredictable style would sink markets. And the recent flap in Washington over the firing of FBI director James Comey has caused a minor 0.3% retreat.
We've been refuting the widespread belief that news affects the market's trend for many years.
Review this graph and commentary from the February 2010 Elliott Wave Theorist:
The Efficient Market Hypothesis argues that as new information enters the marketplace, investors revalue stocks accordingly. If this were true, then the stock market averages would look something like the illustration shown above.
But, as we know, the market did not react in such a rational way.
So, if news doesn't govern the stock market's trend, what does?
We believe it's investor psychology, reflected in what we call Elliott wave patterns, which unfold on the market's price charts.
Right now, the market's wave pattern is providing us with a good idea of whether you should expect a correction in the strong recent uptrend.