Ebola did it

October 24, 2014 11:07 AM

Markets can go up, down or sideways.

Some analysts like to look at fundamental analysis and news to determine where a market is going and in hindsight why a market went in a certain direction. Others look at technical analysis, a study of price in determining where markets are going and why. Recently we have presented some compelling technical evidence for recent moves in equities.

But just because you can apply a news event to a market move doesn’t mean it is the reason it moved the way it did. There are hundreds of stories every day and the market can go in only two directions so simply matching a news item to a market move is sloppy, and silly. As we know from science, correlation does not imply causation. A pet peeve of mine has been wire stories that seem to simply apply the most compelling headline of the day to whatever happens in the market.

Often you see wire stories on the market that attaches a news event with a market move, i.e. 'equities rally as Congress opposes Obamacare.' It could be anything and headline writers often mindlessly and carelessly attach cause and effect scenarios.

A month ago we wrote about this tendency as it related to skirmishes between Russian Separatists and Ukraine. On a daily basis wire services applied whatever was happening in the markets to the progress or lack thereof a ceasefire talks.

More recently it is Ebola. As most of you have heard there is case of Ebola in New York. It is a doctor who was treating Ebola patients in Africa who returned to New York without symptoms and subsequently has come down with the serious disease after going out in public. The fact that this doctor went out into public without being quarantined for a sufficient number of days to ensure there was no chance he was infected is disturbing but I don’t believe it is driving the markets.

Following are some examples of headlines we’ve seen today.

U.S. Stock Futures Fluctuate Amid Ebola Concern.”

This one is particularly interesting. Stocks fluctuate because of Ebola. Apparently without the news, stocks would have just sat at one price. It also allows them to claim causation for either an up move or a down move.

“Yen Halts Six-Day Decline Versus Dollar on New York Ebola Case.”

The story went on to say the Ebola case increased demand for “haven assets.” Not sure if it was a mistake or not to omit the word “safe” there. But the safest haven of course is the U.S. dollar so the lead is kind of fighting with itself. Yes, some people see the Japanese yen and as safe haven but the dollar is the ultimate safe haven and if in fact there was a serious outbreak of Ebola I doubt the dollar would go into a freefall. And the dollar index is only down slightly with one of the more narrow ranges it has had in recent weeks.

“U.S. Index Futures, European Stocks Drop With Oil as Bonds Gain”

The story implies Ebola is pushing down stocks and supporting bonds, as a “safe haven.” As the market near the close both moves have reversed, stocks are up and bonds are basically unchanged. Whew, we averted another disaster. Kind of like a 1970s situation comedy, we had some drama and it was all wrapped up within a 30-minute episode, or one trading day.

“U.S. Stocks Extend Rally on Earnings; Dollar Declines on Ebola”

The early sell-off was because of Ebola but the late rally was due to earnings.  The dollar is still down, let’s keep the Ebola narrative going.

I am not sure why this continues to occur. Perhaps it is the need to place blame. Was the October downturn caused by European weakness? Ebola? We have been writing that there were many cyclical and technical reasons to expect a market correction. But that is kind of boring.

Perhaps analysts feed this to the business media because they may not ask for their opinion  again if they simply reply 'more buyers than sellers.' Or perhaps more conspiratorially, if they can convince retail traders a certain news item is good/bad for the market, it will create an opportunity to take advantage of panicked buyers or sellers.

Futures contributor Jeff Greenblatt has written extensively on the fact that news events tend to occur around market turns and get credit/blame for it when really is was cyclically based.

The problem with buying into these headlines is that if you believe the market moves for a certain reason, when that event changes you may trade off of the original false premise. As noted before, don't read the headlines. 

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.