Focus on the What, Not the Why
Below is an excerpt from a recent post from Mike Cintolo of Cabot Heritage. I can certainly relate to his advice. I get asked "why" the market does this and that more than I care to remember. Trying to rationalize "why" the market moves one way or another most times can be counterproductive. Of course, as humans, we always look for a reason.
For the long weekend, my wife, daughter and I headed up to a beautiful small lake in New Hampshire; two of my buddies have houses on the lake, and we were up there from Saturday morning until Monday evening. We partook of the usual array of July 4th activities--BBQ'ing, swimming, boating, relaxing and just generally hanging out with friends (including a pseudo-celebration of one friend's recent engagement). As always, we had a great time, and it really kicked off the summer season for us.
Of course, while chewing the fat with some pals, the conversation often touches on the stock market; none of them are professionals in the field, but all are involved through retirement accounts, college plans and the like. So they keep track of what the Dow and their various funds are doing.
This year, one of my good friends came out and said something that stuck in my mind: "Wow, what a week for the market ... but for what!? Just some halfway decent news from Greece and the Dow spikes 600 points? That makes no sense," as he shook his head with a laugh and headed off to the cooler.
Another friend simply noted the Dow had been on a tear and asked me, "What caused that?" My reply was a truthful "I don't concern myself with the why as much as the what," to which my friend gave me an odd look and quickly changed the subject.
My point here is that the vast majority of investors (even many professionals), think the WHY is just as, if not more, important than what the market actually did. If a stock or index rallies in huge volume on little news, most investors perceive it as fleeting. But if a stock or market rallies because of an obvious news item, investors jump for joy and are convinced that the upmove will persist.
But in real life, the news of the day is not that important. It's true! As I said to my friend, the fact that a stock or market moves one way or the other on humongous volume is all you need to know. Actions (big investors plowing money into a stock) speak louder than words (news).
Now, don't get me wrong; in some cases, such as earnings reports, our historical research and experience tell us huge gaps following these reports usually lead to a continued move. So some news items are important. But notice in this case, the key is how the stock reacts (the big gap) to the news--not the news itself (what percent earnings were up or down, etc.).
That leads me back to last week, when, out of nowhere and for little reason, the market and most individual stocks took off like a rocket without pausing for breath; every index spiked back above its key 50-day moving average and most stocks did the same.
Optimism over a potential Greece deal was the supposed reason for the ramp, but then again, S&P dumped on that deal over the weekend (and then Moody's downgraded Portugal to junk status on Monday) and that didn't do much damage to the market this week. So what was the reason for the advance? We'll probably only find out many weeks from now, because the market is a discounting mechanism and is likely sniffing out better than expected growth in the months to come.
The moral of this story is that it's better to view the market as its own entity that is separate from everything else; that's not to say it really is separate, but if you try to figure out reasons why the market is up or down every day or week, you'll find yourself frustrated and confused. As they say, you should believe what you see--i.e., focus on the market's own action and ignore the noise.
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