Understanding What is Behind the Price Movements

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You could look at market cycles narrowly – just by keeping your eye on price movements. Or you can look at the Big Picture…all the connections between markets and the rest of the world…in the hopes of understanding what is BEHIND the price movements and where it might take them.

Friday, the Dow dropped 76 points. It’s probably going down soon…but maybe not yet. The Dow would have to rise to about 10,350 to equal the ’29 bounce. And heck, it’s not September yet. September is traditionally the worst month for investors…followed by October, November, December, January, February, March, April, May, June, July and August.

But what’s this? The morning news: Chinese stocks suffered their worst day since November – with the Shanghai index down 6%.

The rally is probably not over; still we wouldn’t want to be long when the market opens in New York this morning. [Ed. Note: By the time the US edition of the DR came out, the Dow had lost close to 200 points.]

Many analysts regard everything beyond the price data as noise. You never know whose ideas or whose explanation or whose predictions are correct, they say. All you really know for sure is the price.

According to the Efficient Market Hypothesis, the price has in it all the information, theories and delusions of all the players in the world. By this reasoning, the price information is ‘perfect.’ No one can know more about what a stock should sell for.

Many analysts think they can watch the patterns of price movements and find some clues at to what they will do next. They see ‘heads and shoulders,’ ascending triangles and descending tops…and think they mean something. For us, here at The Daily Reckoning, price movements tell us something, but only in their extreme form…and only because we have an intuition about the way nature works.

When we see a price that has suddenly shot up, for example, we expect that it will suddenly shoot down sometime in the future. When we see a series of price increases over a long period of time, on the other hand, we expect to see a series of price declines over a long period of time, too. If we look closely, we find that the price at the end of the long incline is exceptionally high…and the price at the end of the long decline is exceptionally low. We believe – intuitively and logically – that exceptional things don’t remain exceptional for very long. That’s why they are exceptional. Broadly, when prices are exceptionally high they will fall – to the point where they are exceptionally low, and vice versa.

Beyond that, we draw little nourishment from the price numbers. They don’t tell us why things are happening. And while we recognize that it is impossible ever to really know why anything happens (the number of butterflies possibly flapping their wings in China is beyond our comprehension), we are nevertheless heirs to the old story-telling tradition of our deathward marching tribe. We want to know why things happen the way they do…we want heroes and villains…we want winners and losers…we want a plausible story that explains what is going on.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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