Nobody Asked Me, But… from Victor Niederhoffer

January 31, 2010 |

The partnership between Ostrich and Zebra The reaction to recent events where something devoutly to be wished actually happened and sadness and disappointment and revulsion occurs is part of a general syndrome related to the dissipation of the sex cells. Time and time again, a company reports good earnings above expectations and a terrible decline ensues. Time and time, an important link in the totality is confirmed a la Bernanke today, and the market drops an immediate 1%. Time and time, a bill that everbody wants, like the stimulus bill, or the Massachusetts election results, occurs, and the market drops an immediate 1% the way it did last Tuesday. What is the reason for this? Is it a variant of 'buy the rumor, sell the news', or is it insiders selling on the news? Or is it related to the general apathy that results when the discharge has occurred? Can it be predicted, and acted upon?

A friend writes in that the ensenble of comovements between bonds and stocks posted on our web site always reminds him of Leo Goodman's classic article "Movements and Comovements between M Dependent Time Series" that Doc Castaldo has kindly sent hundreds of copies out to far sighted researchers in previous glory days. It is good to honor and create a visual model and real life exampe of such important dependcies. And perhaps this will be a prelude to providing statistics on this site that will be at least as informative by half as the average sports statistics contained in such fine publications as The Post or Sporting News under "Stat City". The desire to provide a league standings tabulation is keen.

I am reading several books on animal partnerships and the partnership between the ostrich, which has good eyes, and the zebra, which has good hearing, reminds me of the partnership between many markets. One or the other, whether it's silver or the omniscient one, are there to alert to possible danger. One feels the pain of the CEOs who were at a dinner at the Oval last Wednesday, and learned about the Volcker plan only at 9 pm that night an hour after the dinner and just 12 hours before the 6% decline started. "That's not squash," as my friend from New Zealand used to say when I mixed in a volley or two. Heard at the Olympic Club at 10 pm: "You might want to play an all court game tomorrow, mate."

Of course there is a higher purpose to the recent decline of 6%. First the move must shake out all the weak longs who were buying it based on their hopes for the January baromoter. Next, it has to set all the public behind the form so that they will sell out in disgust at the three-month lows. Finally, it must engender a Dow below 10000 to create the kind of newspaper headlines and fear that will shake out the remaining weak longs before a rally occurs.

Paolo Pezzutti comments:

After you have finished your succulent second plate of spaghetti "all'amatriciana" and you are offered one more, can you eat it? After a long uptrend when earnings have beaten repeatedly expectations for a year, can you really expect more surprises? Some take profits, others go short. It seems that the news release is the trigger to execute actions that were long planned.

I found on CXOAG this post that addresses the issues raised: Earnings Surprises and Future Stock Market Returns. The post reports about the study Aggregate Market Reaction to Earnings Announcements.

The authors investigate the relationship between earnings announcement surprises and market returns on the days surrounding earnings news. The analysis identifies a negative relation between earnings news and market return that persists beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news. There may be a considerable degree of inefficiency in the market’s processing of aggregate earnings information. Consistent with this interpretation they find that Treasury bond rates and implied future inflation expectations respond directly to earnings news.

George Parkanyi writes:

Definitely, the same type of news after a few months loses its power to move the market (true for both the down side and the up). At a certain point you stop listening, you’re on auto-pilot. Markets respond to surprises –- the something new, the something different, or the something possible. This is very much a human characteristic.

A related example was the Internet bubble. Everyone was buying the companies that had no earnings – because while they had no earnings the potential for earnings was unlimited. As soon as companies started to report any kind of a profit, they were crushed. For now someone had put a limitation on all that “potential”. I was highly amused at the time how earnings for an Internet company was the kiss of death.

Kim Zussman writes:

If it were as simple as "up on good news", Galleon and others trading on inside information would immediately overtake the solar system –like a hadron-collider black hole. This evidences supernatural laws which prevent even cheating determinists from commandeering supreme mating rights.

Years ago at a Stephen Hawking lecture on time travel, he "discussed" (the lecture spun from his laptop) various paradoxes produced if one could go back in time. For example, if you killed your parents in the past how could you have been born in the future to go back to kill them? One theory was that when you pulled the trigger, the bullet would "diffract"; somehow splitting before hitting it's target — in compliance with rules keeping the universe in logical order. (whose logic?)

Another theory was parallel universes — one in which your parents died, another they lived and you were allowed to develop.

The questioners were kind to Stephen, because of his illness, but after the show he sat helpless in his wheel-chair in a van outside with the dome light shining on his contorted face like an involuntary spot light. A crowd hovered outside to see the great man, like at the zoo.

On a different note, Pfizer's run-up to the Massachusetts Miracle is typical. Removal of near-certain health care reform and promised payoff by pharma met with big decline. Would you have sold knowing the election results before hand? The upside is that if you can be at peace with the way market treats your logic, you will understand how to be a ladies man.

Duncan Coker writes:

I would like to pick up on Messr Parkanyi's comment regarding "the markets respond to surprises, something new, somthing different or the something possible…this is a human characteristic." I agree. Related to this, I attended a showing of the film Poliwood last night where the director Barry Levinson was there for a Q and A session. It is a documentary about the triangle of media, celebrity and politics and how the lines between reality and theater, entertainment and substance, are becoming more and more blurred. Politicians become celebrities and celebrities become politicians. Media fosters celebrity and celebrity feeds the media. Politicians need the media for promotion and the media needs them for content. One of the ways to get high ratings in news television is to present conflict in a dialogue. That is why guests are always at the extremes of a position. It allows for more yelling, arguing and better entertainment for the viewers. Polarization is more interesting television. Informed and moderate discussions is just boring to watch.

I wonder if this carries over into the market. Stagnant markets are boring, wild swings make for better entertainment. Also, who benefits from wilder markets, financial media has something to write about, brokers and exchanges have more commissions and fees, money managers can justify their services. It allows politicians something to regulate, gives floor trades movement to scalp, hedge funds can fire up the algorithms. The causality works in both directions as well. Last week the politicians spiced up the boring upward move of the past 2 weeks. When a fund is rumored to be weak or going under another spike. The media does all it can to create excitement and volatility around the market. When traders over-trade and the line between entertainment and substance can get blurred. Also, like the television example, conflict is more interesting. In the case of the bulls and bears it is most interesting at the extremes, so the market follow this type of cycle.

Ken Drees adds:

This fits here with financial television as of late. The big question or overall theme being is this just another dip for the market or something more? Hopefully capturing viewers by keeping this nail biting question front and center–having two view points and the ensuing debates roll on out.

Off the bottom it was "is this a sucker's rally or a setup for another drop?"; now its "is this just a little dip and the start of a sideways consolidation, or the start of a substantial 5 -10 % correction?"

It seems like these times of opposing question of market direction after extreme linear moves should be watched closely for reversal. I find it interesting that the choice not talked about much off the march low was this: Or is this the start of a nice 50% multi month rally from oversold conditions not witnessed since 2001?

Today the choice missing would be this: Or is this the start of a 50 to 70% drop, retracing most of the gains of 2009?

TV — usually it's what they don't say or its the opposite of what they scream into your face — making great TV but bad advice.

Comments

8 Comments so far

Craig Bowles on January 29, 2010 7:42 am
FedEx rose 172% and peaked in December. China peaked in August. Both led the last decline.
Steve Leslie on January 29, 2010 10:43 am
Nobody ever asks me but:

Why do things go down after news? In general I see people as very negative thinking. We lead lives of quiet desperation. The masses specialize in Schadefreude. They love to see bad things happen to people. They look at train wrecks, watch TV incessently, read cheap novels. National Enquirer magazines. This is where the public resides. They always assume the worst. If things are bad they are either going to get worse or at least stay bad. If things are good, then it is not long before they will become bad again.

Why are reality shows such a hit. The Osbornes, Growing up Gotti, Hogan, Kardashian, on and on and on……….. Nancy Graves (eeek) we despise our lives so much it gives relief to watch other disfunctional things in the world.

Go back to March of Last year 2009. market hits 6800 why? China Syndrome baby. "Its the end of the world as we know it" Golden Slacks had been fleeced. blah blah blah. 6800 means 6000 right around the corner. Noise at an all time high during crises (plural).

People love to play the victim role. They see themselves as Joe Btfsplk in Lil Abner or Ralph Kramden in the honeymooners.

People would rather avoid pain than seek pleasure. Everbody says they can handle the pressure but in reality only a few can.

Great scene in Cool Hand Luke. Luke is playing poker against Koko. Luke keeps kicking the raise a buck until he drives Koko out of the hand to show the bluff. All the while Dragline is loudmouthing advice to Koko. Eventually the pressure becomes to great.

In the movie the Replacements Gene Hackman says "Everyone says they want the ball only winners mean it." There are too many amateurs handling their money and the money of others. The top pros sit in the weeds like a lion or wade in the waters quietly like a gator patiently until the right moment and attacks the markets with ruthlessness and inpunity to exploit the weakness of others.
michael bonderer on January 29, 2010 12:58 pm
Heard it here (DailySpec) first: See cover story in WSJ's Weekend Journal.
Barry Gitarts on January 29, 2010 1:53 pm
This has me thinking about the recent movements of AAPL & AMZN following their earnings this week.For many quarters AAPL has guided lower, then "surprised" with earnings. After so many quarters, AAPL beating the estimates was no longer a surprise. It was expected.AMZN is the big saturated e-retailer trading at about 70 p/e — how much growth is left? They all say. Apparently much.Side note: In 1984, when Wal-Mart was 22 years old, the company had a 0.3% share of the U.S. retail market, which is equivalent to Amazon’s U.S. retail share today at 15 years old. Over the next 25 years, Wal-Mart’s revenue increased at a 19% CAGR. Consensus is projecting a 25-year revenue CAGR of about 8% for Amazon.
Barry Gitarts on January 29, 2010 1:59 pm
The only thing that actually happened as expected this week, is the Sage's B shares were added to the S&P and went up after the announcement.
Sumit Agrawal on January 29, 2010 3:21 pm
with all respect, i beg you to think that perhaps US is tired of fiscal handouts, and observing that the money velocity continues to remain lackluster, with the consumers indebted with assets, which have lost value, and the cost of funding treasury debt is going up, what can drive the market up, except for the market positioning which remains far more bearish than anybody likes?

on a different, but a connected note, do you think china will revalue the yuan.

i think so. i think they might want to shift attention from sluggish exports to domestic growth and to toning down the asset prices.

A yuan revaluation upwards, i think that it will revalue the substantial chinese savings upwards (relative to the domestic prices) making domestic growth buoyant. A consequent tightening of money supply will keep the asset price growth mediocre.
Andre Wallin on January 31, 2010 2:40 pm
If we keep selling next week my target is 8315 for a gap fill of failed head and shoulders pattern.
This is the most logical path from a technician’s point of view. I don’t see how we can go any higher. Of course this path would be panic selling and we could end up resting after a bounce at around 10,000 and then experience flat market conditions. Didn’t Soros write “inverted square root sign” as his finger in the air speculation about how the market would recover?
Ed Sahione on February 2, 2010 3:53 pm
What if every speculator was thinking the same way?

“I think that the earnings are going to be better than expected, so I’ll buy.” Because of near-past previous experiences of better-than-expected earnings.

When instead, the rational, and profitable, thought would’ve taken the logic one step further:
“I think that people will be long before the earnings are released, because in the near-past they’ve been surprised and want to make money this time. So if the market is overbought when the news arrive, no matter how good it is, everybody will try and sell at a small profit. Hence, the market should go up slightly before coming down. So I’ll buy at the money put options.”

But that line of thinking won’t work next time, because what happened this time will change the expectations of the market in relation to future earnings releases.

In the next case, there are three scenarios in mind:

1) Speculators expect worst earnings than analyst’s expected earnings. In this case they will be oversold.

2) Speculators expect equal or better earnings than analyst’s expected earnings. In this case, they could think:
A) Last time, the market went down with the earnings release. So I’ll be short. This is based on rational expectations.
B) Last time was a fluke, I’ll buy.

But, taking into consideration that they will be oversold nonetheless, I would expect a market rally even after worse than expected earnings.

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