Romulus: When markets seem to make no sense

MARKET Watch

Market action can be extremely counter-intuitive.

I’ve seen people at the very pinnacle of this industry become frustrated with this concept to the point of total self-destruction. Good news is bad news, bad news is good. Stocks go up when you think they should drop and fall when everything is telling you they should rally.

You will often hear talking heads in the financial media say something like, “Investors sold stocks today amid rising uncertainty.”

The future is always uncertain.

A look at the recent past tells us a lot about how the market does illogical things.

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On Nov. 26th, the day after Thanksgiving, an inflation report came out and rocked the markets. The S&P 500 fell over 2% and the small cap stocks dropped 4%. Investors have been on rising inflation alert ever since, while the data over the last 3 months supports an economy plagued by persistently rising prices. Contrary to the foolish summer babblings of fed chairman Powell, this is not a transitory event. Stocks continued to fall for a few more days, but then something unexpected happened. A month-long rally kicked in that took the S&P up 7%, with many sectors and groups doing much better than that.

GOOG released a stellar earning report on February 2nd and the stock gapped up over 10% on the news. Ten percent is a big move for one of the largest companies in the world. Suckers from every corner of the trading universe got drawn in on that, and I wrote that morning in a private newsletter that those fools would soon be parted from their money:

“Google in one hand and Paypal in the other. Google beat their earnings, but it is the stock split announcement that is really firing up the fools. Look at what happened to Apple and Tesla in the month following their stock splits in early September 2020. Those fools will soon be parted from their money.”

GOOG fell 18% from that news driven high to a nearly 7-month low last week.

Throughout most of January, the world watched as Putin amassed troops along the Ukrainian border, amid insistences that he would not attack. This news eventually drove stocks down to points not seen in several months, and in the case of several small cap companies, it wiped away years of gains. Then something unexpected happened. Stocks rallied for two weeks, taking the S&P 500 up 9%, with many sectors and groups doing much better than that.

On Feb. 24, Putin ordered the attack, and global markets got smashed. Stocks were down over 3% in the morning, but then something unexpected happened. In the U.S. at least, the market closed higher on the day. And rallied again the next day, and the day after that.

What the heck is going on?

Putin may have just started World War III. How can stocks go higher during the worst news since Covid started breaking out two years ago?

The answer is that there are two issues at play here. The first is that traders and investors are trained to buy the dips in the stock market. They have been doing it since March of 2009 and it has worked for almost 13 years. It will take fiercer downside action to really shake this habit. There has been a considerable amount of wealth destroyed so far in 2022, but there is still a lot of silly money in dumb hands.

Another issue to consider is the historical framework used by some of the big money types as they analyze recent market behavior. They believe the Fed is in control of the inflation situation and they trust Powell to avoid a major monetary policy mistake. They have misguided faith in the famous "Fed put" (the Fed “puts” a floor under the stock market and won’t let it fall beneath it). In addition, there is an old Wall Street saying that goes, “Buy when the cannons roar, or buy when there is blood in the street.” This is a sentiment that things can’t get any worse than when a war begins, so might as well buy the selloff.

Whether from dumb money or the big money participants, the four-letter word they rely on is hope. They hope stocks rebound as they have done for 13 years. They hope the fed maintains the illusion of control. They hope Putin does the right thing. Meanwhile, stocks are locked in a downtrend all year and keep setting new lows. The losses suffered from all parties is due to their unwillingness to remember that other, and far more important four-letter word, RISK.

The trading characteristics of the last three months are nothing new. Different news events surrounded the activity, but the behavior was the same in 2015 when the S&P fell 15.5% from May of that year to early February of 2016. It was the same in 2008 when stocks rallied after a bad news announcement like the bankruptcy of Lehman Brothers. It was the same in 2001. Tech stocks would get smashed for weeks, then put on a spectacular rally.

It ebbs and it flows, but the river moves on.

On a related note, it is a bad idea in the intermediate or longer-term to trust either the federal reserve or Putin. Eventually, they will both lead you to ruin.

Wealth, like Rome, cannot be built in a day. But, like Rome, it can be lost in a day. Watch for future announcements from Romulus about profitable market moves, important indicators, and major market swings. For trading education, mentoring, or to beat the markets with Romulus' trading group, contact romulus@groktrade.com or go to www.groktrade.com/romulus.