Why Stock Market Signals Outweigh Headlines: Lessons from A Pandemic

The Misdirection

The New York Times (NYT) created buzz with a report alleging that members of the Trump administration enabled “elite traders” to profit off the coronavirus-driven collapse in the stock market. While the administration confidently reassured the public about the coronavirus (COVID-19), members of the administration reportedly shared their concerns about “uncertainties” at a private board meeting at the Hoover Institution. That information in turn made its way to traders. The drama unfolded from February 24th to the 26th as stock market signals contradicted the pandemic headlines.

The PBS News Hour interviewed former investment banker and author William Cohen on this story. The discussion explored the moral implications and the complicated legal questions. While these topics are important, I am particularly intrigued by the related trading lessons. This episode represents yet one more reminder that stock market signals and actions are more important than words. At the time, I was not even paying attention to the claims from the government or official agencies and institutions. In a February 1st post post reaffirming my claims about a topping stock market, I even encouraged readers to ignore predictions about how the coronavirus pandemic would unfold.

“There is a lot of focus on the risks of the coronavirus, but I think predictions are futile. I scoff at pundits who get on the air and provide their reassuring words or their red siren alarms; they are mostly guessing. Market signals are sufficient for sorting through the noise. The management of the growing pandemic is following a typical pattern: spotty info, downplaying, slow concessions to containment measures, aggressive containment measures, and now growing reports all over the globe. Through it all, politicians and health officials will scramble to keep the public calm. “

In other words, I was intently watching the stock market, not the headlines, not the tweets. My posts on the stock market at the time focused on the messages from the market.

A Timeline of Stock Market Signals

On February 24th, the stock market suffered what I described as “synchronized 50DMA breakdowns” (50DMA = 50-day moving average). This news story noted that on the same day President Trump tweeted the following (2:45 mark in the video):

“The Coronavirus is very much under control in the USA. We are in contact with everyone and all relevant countries. CDC & World Health have been working very hard and very smart. Stock Market starting to look very good to me!”

Overall, the tweet indeed sounds very encouraging – not just about the situation in the US, but also about the global efforts. However, the commentary about the stock market raises my eyebrows especially given the tweet arrived after a brutal close for the stock market. The S&P 500 (SPY) lost a whopping 3.4% on its 50DMA breakdown. The NASDAQ (COMPQX) lost 3.7% on its 50DMA breakdown.

With sellers following through on February 25th, Larry Kudlow went on air to reassure the country that the coronavirus was contained in the U.S (2:57 mark in the video). Yet, the S&P 500 fell 3.0% that day and went on to suffer a bearish 200DMA breakdown on February 27th. By my trading rules, I flipped (cautiously) bullish on the stock market prior to the 200DMA breakdown because of the oversold reading on my favorite technical indicator. The subsequent four weeks transformed into the most difficult period of oversold trading since at least 1986! It was only in early April when I started to feel vindicated over maintaining discipline on my trading rules.

A Final Lesson

Whether or not the story about “insiders” trading on privileged information turns out to be true, the contrast between public statements and the stock market’s behavior will stand. Remember this episode whenever you find yourself weighing the stock market signals you have learned to trust versus the words and headlines that carry a myriad of motivations you may never verify or understand.

Be careful out there!

Full disclosure: no positions

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