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Stock market logic not always logical

By From page B7 | September 08, 2013

I remember one thing from my freshman philosophy course. Most all of us know it instinctively, except for some stock market commentators.

It’s the “analysis” that says, “after this, therefore because of this.” The example used, which I’m sure has been expunged from textbooks, was when it rains after a rain dance is done. The belief is that the change in the weather was caused by the dance.

Well, some analysts and the stock market channels are occasionally guilty of that kind of logic. So Friday, when the closely watched monthly employment report came out and  showed a somewhat weaker economic recovery than predicted, the comment was made that the early selloff in the market was due to a sign of a “fizzle.”

But wait! No, it was a report that there was more friction than expected between Russia and the United States at the G-20 summit in St. Petersburg.

When the market turned up, the word was that the August economic report was not that bad when it came in at 7.3 percent unemployment with 169,000 jobs created. Further, the astute observation was made that investors had “shrugged off” the reports that the Russians would continue to back their Syrian friends regardless of what we did.

Here’s the key to getting paid an obscene amount of money to talk about the economy: simply follow the up-to-the-minute market activity and any economic or political news. Then your job is to say that the two are related. If, later in the market day, we see a reversal of the earlier trend, tell us that investors were encouraged or discouraged by the news.

I’m keeping the stock market news on TV as I write this and there certainly is some intelligent commentary. One reporter said the number of “discouraged” would-be workers was at a worrisomely high number and that certainly was something to pay attention to. I’ve been a news addict for as long as I can remember, but I’m not sure whether it helps in predicting market direction.

I would, however, pay attention to comments from a few famous, and infamous, market observers. Perhaps the most important remarks would come from Federal Reserve or Treasury officials. It was a legendary observation that Fed chairmen would never say what they intended to do about interest rates. However, they would make comments that, like the ancient Delphian oracle, had to be interpreted to be understood.

It was unheard of for a Fed chairman, or a Treasury secretary, to say something direct about interest rates. But make no mistake, even the slightest hint about Federal Reserve policy could move the markets. Professional observers who had a better-than-average record in stock or bond market forecasting were well rewarded.

With the advent of the Internet, anyone can become an “expert” on various markets, but whether it’s easier to make money now is doubtful. If you’re a contrarian, you would just as soon keep a successful source of advice restricted to the “privileged” few.

If you remember the market of 1999 and 2000, you know that Internet-related stocks were the place to be. There was an Internet stock that had an initial public offering at $10 or $15 and immediately shot up to around $100. It only stayed at that ridiculously high price for a few seconds, but that gives you an idea of how feverish the market was.

There were a few observers who saw the crash coming, but they were in the minority. These days, of course, we can all sit at our computers and become millionaires. But remember the old piece of advice: It’s easy to become a millionaire in the stock market.

Just start out with $2 million.

Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at [email protected]

Bud Stevenson

Bud Stevenson

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