by Bob Stokes
Updated: August 28, 2018
Editor's note: The August Elliott Wave Theorist says, "In recent months, the media have focused on news as causal to stock market movements. Whether it is economic numbers, tariffs, OPEC's actions, Russian shenanigans, the actions of special counsel, events in Turkey or Trump's tweets, there is always a ready explanation--after the fact--for market movements. How valid is this perennial exercise? Do events outside the market really determine where it goes?" We thought it would be a good time to explore whether there's a connection between news and the stock market.
You almost never see a headline that says, "There is no apparent reason for today's stock market movement."
Financial journalists just assume that some news development is driving the day's price action, so they search for a news item that fits the best.
Sometimes, however, they do a 180-degree turn that makes you wonder about the soundness of all those news / stock market explanations.
Here's what I'm talking about: On June 5, 2009, the stock market climbed but then retreated. These headlines were published less than an hour apart:
U.S. Stocks Surge as Jobs Report Spurs Optimism on Economy
June 5, 2009; 13:39 GMT (Bloomberg)
Markets Slide on Jobless News
June 5, 2009; 14:31 GMT (UPI)
Occasions when financial journalists use the same news development to explain the market's rise and fall happen more often than you might realize.
But, our research shows that it's a myth that the news determines the trend of the stock market.
Robert Prechter's 2017 book, The Socionomic Theory of Finance, is filled with illustration after illustration which show no link between so-called "catalysts" and the stock market.
This chart and commentary from the book is just one example:
Suppose you knew for certain that GDP would be positive every single quarter for the next 3¾ years and that one of those quarters would surprise economists in sporting the strongest quarterly rise in GDP over a half-century span. Would you buy stocks?
If you had acted on such knowledge in March 1976, you would have owned stocks for four years in which the DJIA fell 22%. Near the end of Q1 1980, had you realized that both the current and the next quarter's GDP would be negative, and you thought that development would be bearish, you would have sold stocks at the bottom.
Suppose you possessed guaranteed knowledge that the next quarter's GDP would be the strongest over a span of 15 years. Would you buy stocks? Had you anticipated precisely this event for Q4 1987, you would have owned stocks for the biggest stock market crash since 1929.
As the just-published August Elliott Wave Theorist notes:
The exogenous-cause mindset provides a broad template for rationalizing market movements. It doesn't matter what the facts are; one can use them in various contradictory ways to excuse emotions and actions that express either a positive or negative mood.
The belief that news determines the market's trend is just one myth.
Our free report, "Market Myths Exposed," shows you more.
Did you know that the vast majority of portfolios are built on false assumptions? These false assumptions -- or Market Myths -- have been passed down across generations. They are so baked into investor psyche that no one ever thinks to challenge them... but we do. Do earnings really drive stock prices? Can the FDIC actually protect you? Is portfolio diversification a smart move? Download Market Myths Exposed now and find out whether your portfolio is built on flawed foundations. We guarantee you'll be shocked to find the truth.
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