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The Phrase that Initiates Recessions

October 6, 2015

The Phrase that Initiates Recessions

It Can’t Get Any Worse?

On Friday, shortly after the release of the payrolls report, we asked half in jest whether the time had finally come for the market to interpret bad news as bad news, and not as an opportunity to speculate on more central bank largesse. As someone remarked to us later: “You had to ask”.

three-light-switchesPhoto credit: Paul Cross

Apparently a slightly later released news item informing us that “factory orders hit the skids” was taken as a buy signal of the “it can’t get any worse” sort. Normally it is considered bullish when the market rises on ostensibly bad news – and very often, this is actually the correct interpretation of such market action. However, one must be careful when the fundamental backdrop is subject to severe deterioration. Readers may recall that commentary on the markets was brimming over with the same type of argument in late 2007 and early 2008. In October 2007, the market in its unending wisdom priced the shares of Fannie Mae at $73 for instance.

S&P 500, 10 minute chartSPX, 10 minute chart – after initially sliding on Friday, the market quickly recovered and has rallied quite a bit since then – click to enlarge.

The point is this: Although as a trader one must always respect market action, especially in the short term, one must at the same time avoid to ascribe to the mass of market participants a degree of wisdom they simply don’t possess. The market very often “knows” nothing and frequently tends to get things completely wrong. If that were not so, there would never be any buying or selling opportunities, but plenty of those obviously exist.

The “Throwing of the Light Switch”

Anyway, over the weekend we caught up a little on our reading, and inter alia came across an article at Wolfstreeta friend had pointed out to us, which discusses the recent weakness in US manufacturing data.

…click on the above link to read the rest of the article…

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