When Bad News Sounds Good

Gordon Scott  |

When I work as a professional trading coach, I like to remind people that the market has a mood. Anticipating that mood can pay off handsomely. Getting it wrong is about as productive as buying your sweetheart a screwdriver set on Mother’s day. When trying to explain why the market reacts in a perplexing way to certain news items, it is useful to remember the notion of a market mood.

I often explain to my students that when the market is in a buying mood, it will ignore all sorts of worrisome data and run the indexes up higher. But when the market is in a selling mood, any excuse to exit will do. Paying attention to anomalous reactions to news helps traders keep a finger on the pulse of the market. This attention keeps traders from being caught by surprise as the market’s mood swings.

Wednesday was an interesting example of this concept. The major indexes rose one percent higher only minutes after ADP’s Non-Farm Employment Change numbers were released. Over the last two years this report has missed its forecast eight times (see figure below). But one of those occasions was more notable. It was September 1, 2010.

As seen in the figure above, the ADP Non-Farm Employment Change report came out with number below analysts’ forecasts (September 1, 2010 is marked with a red arrow). Analysts had expected the report to show that a paltry twenty thousand jobs had been added in the economy over the previous month, but the actual numbers were reported to be a ten-thousand job loss rather than any gain. Despite the bad news, the markets strongly rallied throughout the session.

What the news DIDN’T say

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The most recent report released on Wednesday was, like the September 2010 report, a different story from the norm. Shortly after the opening the market quickly rose a full percent higher than the previous close, even though the report missed its forecast by twenty thousand.

The few journalists who bothered to report on the news focused almost exclusively on the fact that the report was positive; namely, 170K new jobs were added to the payrolls last month. It sounds good until you consider that the previous month’s figure was 325,000 and the month before that was 206,000. What this report showed was nothing less than a rapid reversal of trend, and yet the market shrugged it off altogether.

Moody is as moody does

I like to explain this kind of situation to my students this way:  investors know what they want to do, and they go looking for excuses to do it. When the market finds excuses to buy even in the face of chilling news, we as traders should pay attention. This is the market’s way of letting us know it’s collective mood. Based on the current mood of the markets, it is worthwhile to ask if can find additional evidence that the markets may be poised to trend significantly higher over the next several months.

Additional note: If you are interested to know about coaching for equities trading, or if you just like reading my articles, click here to sign up and attend a free webinar sponsored by Equities.com. It will take place Tuesday February 7th at 8:00 pm Eastern Time. I’ll be discussing, “How traders can find high-probability trades in the current market environment.” Hope to see you there!

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