Macro Wrap – THE Reason For This Selloff, $SPY, $GLD

by Enis January 30, 2014 7:42 am • Commentary

It’s been high season for Turkey jokes over the past week.  I’m Turkish-American, so I’ve heard my fair share of Turkey jokes, though usually around Thanksgiving season rather than early January, and usually related to the bird rather than panicky global markets.

Jokes aside, however, traders around the world, as they’re so prone to do, are placing far too much importance on what’s going on in Turkey as “THE REASON” for markets moving lower.

The catalyst for a selloff is rarely the reason for the selloff.  In fact, as I’ve noted in many Macro Wraps before, the “reason” is often ascribed to the selloff after it’s already taken place.  Even when we’re in the midst, traders scramble for headlines to explain stocks moving lower.  That’s natural in the very uncertain world of financial markets, and humans hard wired to EXPLAIN events.

Kid Dynamite is a former Wall Street trader and hilarious blogger who frequently derides gold bugs about the futility of many of their explanations (NOTE:  I’m currently long a GLD call spread).  Here’s a gem from last year:

If you’re familiar with the detrius that spews out of the gold and silver blogosphere on a daily basis, you’ve probably heard the breathless ranting lately about deliberate downward manipulation in gold prices.

Today, if you got up early, you saw these manipulators in action again – RIPPING the price of gold higher in the super-illiquid hour of 4am Eastern time, by buying 20,000 COMEX contracts in a span of roughly 10 minutes.

Paper Bull Raid!

Paper Bull Raid!

That’s the equivalent of 2 million ounces of gold – roughly 2% of total annual gold mine production bought in a span of mere *minutes*.  That’s almost THREE BILLION dollars worth of gold bought in short order, obviously designed to do only one thing:  drive the price higher.

Yet somehow I doubt we’ll see the precious metals patriots telling it like it is and complaining about today’s vertical price action in illiquid hours.

Kid’s point is that market participants often use a story to fit the moves, but don’t look for reasons when markets move in their own direction.  It’s often the same in the stock market – few people look for reasons why the market is up, but everyone wants a reason when the market is down.

Like most movements in markets, the real cause of price moves is usually positioning and investor psychology.  News headlines occasionally act as the catalyst to clean out markets that are too tilted in one direction (too underweight stocks at bottoms and too overweight stocks at tops).  Yet, it’s the underlying tilt and psychology that usually leads investors to action, not the news itself.

For example, I’ve been around traders my whole professional career, and very few of them know whether government shutdowns, emerging market currency crises, debt ceiling debates, terrorist attacks, gigantic volcanic ash clouds over Europe, or myriad other scary events are the most impactful for markets.  That’s because, in my experience, it’s the positioning and condition of markets at the time of those events that is more relevant for the market’s reaction than the event itself.  Hence the old trader saying, pay attention to the reaction to the news rather than the news itself.

Especially when talking about the stock market as a whole (as opposed to single stocks, where news can matter much more), one factor is very rarely the reason for the move.  Whether it’s Turkey, the jobs report, or even the Fed, the news rarely matters.

All that aside, can someone point me in the direction of the best emerging-market expert?