Why does good news sometimes cause markets to fall?

When Good News Turns Bad

One of the most difficult things to understand about the markets for the uninitiated, is how good news can cause prices to fall. Or vice versa, why seemingly bad news sometimes causes markets to rise. It appears to make no sense – it’s a paradox.

Last week was a perfect example when great economic data for the United States job market was released showing the lowest unemployment since 2008 pre-Global Financial Crisis times. This is a significant sign that the US economy is improving. Companies thrive in good economic times, more jobs are created and more profits are made so this all sounds like good news right? Yet stocks plummeted on the news. How can that possibly make sense?

Early in my career when I had an interest in the markets, yet little understanding of them, I would catch a pre-market headline such as ABC stock profit rises 10 per cent and think that was great news only to see the stock price fall 5 per cent when it opened. Why did this happen? The answer is that the market expected ABC profit to rise more than the 10 per cent announced.

For arguments sake, let’s say the market expected a profit increase of 20 per cent. This market expectation is always priced into the market price; it’s the classic ‘buy the rumour’ situation. However great a 10 per cent increase in profits might be for ABC, it missed expectations and hence the price will fall to reflect the factual evidence versus the market expectations. Buy the rumour, sell the fact.

It’s actually pretty simple and straightforward, you just need to be fully informed and know both market expectations as well as facts.

Quantitative Easing

The current situation with the global markets is a little more complicated but there is a method to the madness. In recent years the US economy has been in bad shape and just a few years back in 08/09 things got so bad and the markets plummeted so fast that the US Federal Reserve stepped in and starting pumping cash into the markets to stimulate the economy. You have probably heard the term ‘quantitative easing’ or ‘QE’ been bandied about but may not have known what it meant. Well in simple terms that’s what QE is… pumping money into the markets to stimulate the economy. When a central bank’s normal policy is not working effectively (like in 2008) and they want to stimulate their economy, QE is one of the tricks up their sleeve.

The US Federal Reserve has been playing this card since late 2008 and to date they have not stopped. The Fed has continued with QE for one simple reason, the economy was not sufficiently recovered to stop it … until now perhaps?

Coming back to the great jobless figure stats in the US last week and the logic behind stocks falling on the news, here goes…

The US stock markets have risen strongly since early 2009 and one supporting reason for these on-going stock price rises is the Fed pumping money into the markets via their continued QE policy. The Fed is likely to continue QE until they see the economy is sufficiently recovered to look after itself without their assistance. The economic data out recently is undoubtedly showing great signs for the US economy, however it is getting sufficiently good that it is also predicted by the market that the Fed will start to slow their QE sometime soon. The Fed slowing or even stopping QE takes away one of the factors supporting price rises in stocks. Therefore, this good news for the economy is bad for the markets in the short-term as the market now prices in the possibility of reduced QE by the Fed and market participants start selling. So the markets will likely continue to fall in the short term on good news as we have seen already. The long-term however is another story.

Just like the good news for ABC stock rising 10 per cent is probably a good thing in the long-term, it can also be a bad thing in the short-term as the market readjusts prices based on the facts in front of them.

Looking Ahead

In the short-term this situation is likely to cause more volatility. We are in that strange situation of markets falling on good news and markets rising on bad news. This will probably continue until we know the Fed’s position and they have made a clear public statement as to their future QE intentions. Until we know the facts, the market will continue to trade based on the ‘probability’ of what is most likely to happen.

At some point in the future QE will stop. I don’t have a crystal ball so I can’t tell you when that will be. What I can safely predict however is that when it happens, the US economy will be standing on its own two feet again and that can only be a good thing.

We will then be back to normal monetary policy conditions and low and behold, the market will start to rise on good economic news and fall on bad news. Just like the good old days before the term Global Financial Crisis was coined.

Credit for this great article goes to Nick McDonald.

The Famous Turtle Trading Program

In the middle of 1983, two established traders, Richard Dennis and William Eckhardt had a discussion over what type of person could learn to trade.

Dennis believed that he could teach people to become great traders. Eckhardt thought genetics were the determining factor.

In order to settle the matter, Dennis suggested that they recruit and train some traders and give them actual accounts to trade to see which one of them was correct.

They took out a large ad advertising positions for trading apprentices in Barron’s, the Wall Street Journal and the New York Times. The ad stated that after a brief training session, the trainees would be supplied with an account to trade.

This group was invited to Chicago and trained for two weeks at the end of December, 1983. They began trading small accounts at the beginning of January. After they proved themselves, Dennis funded most of the trainees with $1 million in February.

“The students were called the ‘Turtles.’ (Mr. Dennis, who says he had just returned from Asia when he started the program, explains that he described it to someone by saying, ‘We are going to grow traders just like they grow turtles in Singapore.’)” – Stanley W. Angrist, Wall Street Journal 09/05/1989

The Turtles became the most famous experiment in trading history because over the next four years, they earned an aggregate sum of over $100 million dollars.

Richard Dennis proved that with a simple set of rules, he could take people with little or no trading experience and make them excellent traders.

First of all, this inspired a well-known and very popular movie starring Eddie Murphy, Dan Aykroyd and Jamie Lee Curtis, which most people have seen, and consider a classic. Here’s the trailer:

Trading Places movie trailer

Next, finding information on the Turtle systems has often proven to be quite difficult- one of the traders, Curtis Faith published a book on it, and another author Michael Covel released a well-known researched book on it. They can be found here:

Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders Hardcover
by Curtis Faith (Author) 

The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires
by Michael W. Covel (Author)

The system was of course, a trend-trading system, based on very specific signals- the books are a great read, and source of inspiration for new trades, and not that out-dated.

A fellow London trader and writer for the Huffington Post, Zaheer, wrote a brief article with more information on the system, since his mentor was trained by one of the original Turtles.

It’s worth a read- you can find the link here:

Zaheer AnwariFOREX, Futures and Stocks Trader

The Turtle Traders

The Bet

“We’re going to raise traders like they raise turtles in Singapore.” That is what one of the world’s famous commodities speculators, Richard Dennis, said to his good friend William Eckhardt, an equally successful trader. Back in 1983…

Some caution ahead of this week’s NFP!

Hi everyone,

First of all, this is a reminder for you to book your coaching in with me as soon as possible, especially before your coaching session expire!

If you need assistance, please do not hesitate to contact Katie.lewis@learntotrade.co.uk to help you book yourself in.

I recommend you book in for coaching this week, or next.

As for general trading conditions, please note that this week Friday is Non-Farm Payroll day, and the market is very likely to swing about wildly between Thursday and Friday. In order to keep yourself safe, I recommend you do not trade on either Thursday or Friday this week.

I will go over this in greater detail in this week’s Midweek Market Focus!

Also, if this week becomes very sluggish, and hardly moves between today and Wednesday, it’s likely due to the market deciding to wait until then, and being undecided, or pausing. This is in itself a indication to wait and not trade.

From a technical analysis point of view, please note the following can contribute to extreme changes in daily trends:

All the charts below (weekly/daily/monthly) show the majors at or very near key horizontal levels, starting with the USD Index- this indicates that a reversal could well happen this week- this is often the case when the market hits key levels at the same time- then, it’s the US Dollar that will probably tip the game. Please be aware of this!