Naturally, when markets go up or down, people look for cause and effect. We went up because of X, or we went down because of Y. The market “liked” this or it did not “like” that.
But in many cases (and I would argue, in most cases), PRICE is the cause. More transactions occur because the price changed than because the news changed. We can rationalize and reason and assess all we want. When we actually push buy or sell, we care most about PRICE. Because whatever our reasoning, at the end of the day, month, or year, the only reason we are successful is because of PRICE. Not because of the reasoning. Not because of the news. Not because of Ben Bernanke, or Mario Draghi, or Shinzo Abe. Because of PRICE.
That’s why there are successful traders who don’t even pay attention to the news. They don’t care about the why of PRICE. They only care about PRICE. And they react accordingly.
There is a discipline in such simplicity. I see its value from my own experiences. I remember in 2010 when I sold NFLX around $65, feeling pretty good about my nice gain, simply because WMT said it was coming up with its own DVD rental service. NFLX stock was down 5% on the headline, and I smugly exited, thinking, here comes the behemoth to crush the upstart. NFLX went to $300 from there, in a pretty simple uptrend, and momentum players who only focused on PRICE did much better than silly me, focused on news.
Understanding the rationale behind a move can be helpful, don’t get me wrong. The reasoning helps in finding the best assets to use to express that view, and auxiliary moves might be relevant. But as Brian Shannon of alphatrends.net likes to say, only PRICE pays. There is much wisdom in that statement. Wisdom that takes much longer to absorb than you’d think.
In the current market, I think PRICE is the catalyst more than the news. You can parse all the economic data, central bank commentary, and earnings data that you wish, but if the SPX breaks 1600, there are likely many stops lurking below that send us to even lower prices. If the 10 year Treasury yield breaks 2.50%, there are likely many stops lurking that send us to even higher yields. When gold broke $1500/oz earlier this year, it was PRICE that was the catalyst for lower prices. Not Cyprus, not India, not central bank manipulation.
As we approach a widely-watched level, the value of watching PRICE becomes even more important. Don’t be fooled by the myriad explanations. Most of those explaining are not pushing buy or sell. And those pushing buy or sell usually don’t care about the explanation. They care about PRICE.