The markets are ripping this morning on the back of some terrible housing news, and renewed tensions with North Korea. Of course, for those that follow the popular orthodox that "news drives the markets" this is a bit of a head-scratcher. So no doubt, they go searching for something else and come up with consumer confidence numbers that were "surprisingly" higher. Yes, that must be why the markets are 3% higher - and still climbing.
If one is still not convinced that social mood determines the interpretation of news, rather than reacting to the news, all one has to do is watch the early market hours and how headlines change among the mass media outlets. This morning's headlines were along the lines of "futures point lower on Case-Shiller home price data." A half hour after market open, they had reversed course and turned positive with no additional information. The Nasdaq alone rallied 2.3% from 9:30 to 10. At 10 o'clock the consumer confidence numbers were released and the markets rallied further. Now the headlines read "stocks jump as consumer confidence surges higher."
It doesn't pass the sniff test.
If stocks opened lower because of falling home prices, then why did they rally strongly in the first half hour of trading? Why are the worse than expected home price declines less important than the better than expected consumer confidence increases? If the markets were lower now, what do you think the headlines would focus on? Home prices or consumer confidence? Home prices obviously. So what determines the news? Is it whatever "most" people think is "most" important? Or does the market's reaction determine how we interpret the news?
The market has its own preferences based on the underlying social mood which determines how news is interpreted. Social mood is in the process of correcting the collapse in optimism we saw last autumn. So while mood is improving, nearly any piece of news will be greeted with a positive slant. Even terrible news can be construed to be positive if one focuses on a certain component or a "second derivative."
Socionomic Theory contends that social mood in humans patterns itself much the same as countless other creatures pattern their behaviour, and the stock market is the best barometer of social mood we have. What this morning's trading tells us is that the wave of optimism is still rolling. The decline we saw over the past few weeks was not met with a corresponding drop in optimism.
If I were looking for a lasting top to this market (which I am), I would be looking for a change in character in social mood. I would be looking for a certain datapoint or comment from a highly respected person that would normally be considered bullish to be completely ignored and for headlines like "stocks drop substantially despite optimistic comments from Buffett."
Until something like that occurs, expect the markets to wind higher and squeeze the shorts into oblivion.
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