The Market Doesn’t Care, Until It Cares

If you’re going to trend/momentum trade you’ve got to be aware of the news flow and macro environment, there’s no way to escape it.  Not only to manage risk, but to find those industries and sectors that are in play on a weekly and monthly basis.  But paying close attention to news flow can often be overwhelming and can get you lost in the trees despite the forest.  I am so incredibly connected to the market on a day to day basis, to the news flow through my StockTwits stream, Briefing.com, my trading platform, the blogs I read, and other media I consume.

It can be very confusing sometimes why the market seems to be ignoring or hyper focused on a specific trend, piece of data, or news story.  Many times it makes little sense, especially for those of us who live and breathe this stuff daily, know all the issues and the assets connected to them.

Just a few recent examples of what I’m talking about.  Why was the sovereign debt issue all of the sudden so important to the market in late April early May after everyone knew all the issues months earlier?  Why last week did many municipal bonds go no bid after we’ve know about the tremendous problems state’s face with their budgets for months and months.  Why has crude lagged the rest of the commodity complex and equity market so drastically while just about everyone out there is aware of peak oil, the dollar getting smacked around, and soaring growth overseas in emerging market economies?  Why aren’t the bidding for crude yet?  This is why we saw the rare earth metals producers climb rapidly after months of knowing about the issues faced by the US in regards to access to these materials.

The simple answer is this, and it fits perfectly with my overall market philosophy.  Markets are not efficient and do not gradually discount all of the news.  Markets are highly inefficient and price follows capital flow, not fundamentals.  As I like to say often, there is no such thing as greed in the market, just fear, fear of losing and fear of not having enough.  Fear forces capital in and out of assets rapidly.  This explains to a great extent the next saying, “the market doesn’t care, until it does.”

It’s such a simple sentence, but says so much about why markets act the way they do.  Market participants will ignore the data until they don’t, until they decide to discount it, and often rapidly.  This is why we get high volatility breakouts in stocks and other assets.  This is why we see huge breakdowns and waterfall declines like last week in the muni bond market.  The market suddenly cared about data and underlying fundamentals that we have been aware of for a long while.

This is why we pay attention to charts, not because of all the oscillators and indicators, but because the chart of price and VOLUME says just about everything you need to know about how market participants feel regarding a subject or specific asset.  The chart is a direct representation of the fear and capital flow in and out of that asset.  By paying close attention to price and the patterns found in charts over and over again, we’re better able to time when the market has decided to pay closer attention to an issue.  Maybe Las Vegas Sands $LVS is ridiculously over valued right now on many levels, but nothing in the flow of capital says that the market cares, yet.

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