August 8, 2011…in an alternate reality

Had US stocks made new highs on 8 August, 2011, instead of completing a 20% downmove over only 2 weeks, the headlines would have been “Record Earnings Propel S&P 500 To 3-Year High,” “Confident Bond Market Lifts Stocks,” and “Dow Soars On Resolution Of Debt-Ceiling Crisis.”

And each headline would have been a lie—not because there weren’t record corporate earnings (there were,) not because the bond market wasn’t confident (it was,) and not because the debt-ceiling crisis hadn’t just been resolved (it had,) but because the premise that news explains or causes stock price action is false. As is irrefutably evidenced by the fact that the facts about the external world (earnings, bond markets, political events) asserted by those hypothetical headlines were all undeniably true.

Pervasive good economic news has a very high correlation with market tops, and pervasive bad economic news has a very high correlation with market bottoms. For example, compare and contrast the economic news in late 1999 to that in early 2009. Were that not so, economic news would feed on itself, causing both the markets and economy to accelerate ever faster in one direction of the other, with nothing to stop it.

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3 Responses to “August 8, 2011…in an alternate reality”

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