Friday, May 13, 2011

Barry Ritholtz - Rorschach Markets: Consolidating, Rolling Over or Crashing?

Barry Ritholtz - Rorschach Markets: Consolidating, Rolling Over or Crashing?

Great post from Barry Ritholtz about the schizophrenic market participants.

Markets are interesting because you can always find pieces of news/data that supports your view. If you don't you can blame it all on 'technicals'.

During my first week sitting on a trading desk I was asked to put together important news about certain markets, so I prepared an Excel spreadsheet linked to Bloomberg and at the end of the trading day I would check the daily changes in particular assets and look for important news that would signal the move was in the expected direction.

Grain markets were the best ever to analyze. One day rainy weather was good. The other day it was bad. But after a period of 1 or 2 weeks you could really see that there are so many more variables, correlations, etc involved in market pricing that I went to my boss and said something like "Hey, can I just tell you what the news are? I mean... the market moves are random short-term unless there's really big news, reports coming out, etc. All journalists and commentators do is pick something every day to tell the general public." and the reply was like "It took you weeks to figure that out?". Strike 1.

One of the things that I find especially interesting is the nuance surrounding market commentary. I have long argued that markets are Rorschach tests, and the recent volatility provides yet more examples of that.

In April, a variety of US markets set multi-year highs — the S&P500, the Dow Industrials, the Trannies, and the Nasdaq — all hit fresh peaks (on albeit weak volume).
Since we are long, and are still within a few percent of the recent highs, my bias is to view this as a consolidation. Those people who are in cash may view it as the beginning of a pullback that (hopefully) affords them a better entry point. Those short may see it as a beginning of the inevitable crash. Hence, my phrase “Rorschach Markets.”
You can see similar bias in the economic data. We heard a few weeks ago from some folks that rising commodity prices were sure to bring about the next recession as they crimp consumer spending and lead to inflation. Now that energy and metal prices are falling, we are being told its proof of a slow down never mind the deflation or boost to consumers wallets.
I bring these up not to say one side or the other is right or wrong, but to point point out the biases inherent in the process of looking at and assessing data.
So lie down on the couch, have a look at these photos, and tell me: What do you see?

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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