Does news determine the direction on the market?

Whenever there is a big move in the rand (or any financial market), the first question that is asked is, “What news caused this move?” And the generally held belief is: • If the market has risen in price, the news must have been good news • if the market has fallen, the news must have been bad news. Makes logical sense; but if this is what happened, everyone could easily make money. Unfortunately, the markets don’t conform to this logic. For one, there are a myriad factors influencing a market at any one time, ranging from what is political to social, financial and economic. But it can be argued that there are times when there are BIG news items that have much more of an effect on the market than other times. Surely at times like these the character of the news must influence the direction of the market – right? Well, let’s look at a classic example. On the right is a chart of the Dow Jones from mid- 2008 through to March 2009 (when the market finally bottomed). If we cast our minds back, we will remember that September 2008 was when the financial crisis became full blown, with Lehman Brothers declaring bankruptcy on the 15th and AIG needing a bail-out the next day. Three days later, to try to prevent a market sell-off, the SEC banned short-selling on financial institution stocks. With the pack of cards teetering, US Treasury hastily put together a $700bn rescue package to assist institutions in distress. On 29 September 2008, the bill was put to the House of Representatives – and was rejected. BAD news for the markets. And the Dow Jones ‘predictably’ dropped 774 points on the day. A revised package was put together and resubmitted to the House on 3 October – and was approved! GOOD news for the markets this time! And based on logic, the Dow should have risen. But what happened? The market discounted this completely – and fell 2600 points over the next week! If ever there was a clear, classic illustration that news does not determine the direction of the market, this is it. So why did the market continue to fall? Simply because the overall sentiment of the crowd of persons trading in that market was negative, and they were looking for any reason to SELL, not buy. And so the market continued to fall, until almost everyone had turned bearish and there was no-one to push it any lower, which is what happened in March 2009. This extreme of sentiment meant a change in trend was imminent. Understand this and you will see the rand and other markets in a different light. Sentiment (mass human emotion) drives the market – not news. And price patterns are merely a reflection of these changes in sentiment, which tend to recur (because we are humans that tend to react the same way in similar circumstances). And because of this, although irrational, there is some predictability about the market. For more info on the rand, go to www.forexforecasts. co.za/go/ZAROutlook CAPTION James Paynter is the head market analyst at Dynamic Outcomes