Today's Quote: “One half of knowing what you want is knowing what you must give up before you get it." - Sidney Howard.

Fundamental versus Technical, continued…

We have used the phrase, “built into the price” at least a couple of times already in the prior two issues while discussing this fundamental-technical debate. Let’s take a look at an excellent example. There are examples every day to some degree, but this example is one everyone can relate to on a common sense basis.

Let’s to back in time to before our country’s 9-11 terrorist attack. What affect do you think it would have on the market if it opened to the news that a major city of a free country had a series of bombings that killed 56, injured 700, and incapacitated a city for the day? And what if those bombings were unquestionably the act of terrorism? I can not say for sure, but I think most of us would agree that this would have a very negative impact on the market for some period of time if this happened before September 11th, 2001.

Well, this is exactly what happened on July 7th, 2005. The city was London. Our market opened to the news of this, and it did gap down. Then it traded straight up. All day. By the next day we were well over the prior day’s high, and we went up 6 straight days. So, how does one account for this? From a fundamental point of view, we should have shorted the ‘bad news’ and hung on. The resulting loss would have to be attributed to the fact that the market must ‘likes’ terrorism. Is this what is going on?

There is little doubt (though no one can say for sure of course) that the market would have traded down for days if this happened before September 11th, 2001. However, it did not. The reason is that after our countries ‘9-11’, there has been a certain expectation for terrorism. How much? Well that is the key question. We never know. Obviously the market had built into it an expectation of ‘more’ than just three bombs in London. What would it take to go beyond what the market has expected? We don’t know. That is why you can never interpret news on its face value. It is not ‘bad’ unless it is worse than the worse expectations of the market.