Every day that the stock markets are open, a host of TV, radio and print sources tell us what the market is doing and, more importantly, claim to tell us why. Oh really? Is it that easy? CNBC and Bloomberg News and the market wrap programs on every radio show seem to make that claim. We hear one day that the market went up because investors are optimistic or because a major technology company had a good quarterly earnings report. On other days were are told the market dropped because of a terrorism scare, due to technical reasons, or because of that great catch-all phenomenon of “profit taking.” This may be entertaining to some investors but it is also probably wrong and potentially damaging.
First of all, each day millions of investors make millions of individual decisions to buy or sell billions of dollars of stock. Is it possible that they are all acting on one specific trend, feeling or news event? It’s not likely. Yet the commentators seem to believe that just one or two major events are what moves the markets up or down on every trading day. This is absurd, but it doesn’t stop them from making the claim.
Of course, they are not doing this out of evil intent—something has to be reported, and it has to be done quickly, in a small space on a printed page or in a few seconds of airtime. It has to be done without the benefit of months or years of research and polling into what was going on in investors’ heads on that particular day. It is ridiculous, nonetheless.
Consider their favorite reason: profit-taking. Investors take profits every minute of every trading day. Someone is always selling. Why does profit-taking account for the markets moves on some days and not others? The insidious effect of this type of reporting is to make investors feel that the market’s daily moves can be explained fairly easily by singular trends or phenomena.
The next leap from that position is to believe that the short-term moves can be predicted. That is impossible. Consider the capture of Saddam Hussein. The feeling on the morning of the first trading day after his capture was that the markets would shoot up that day, and probably settle back the next day on “profit-taking.” Instead, the markets fell sharply on the first day after his capture, and then rose strongly on the second day. Investors who believed in predictability might have made costly wrong decisions.
