Tales of a Technician: Price Drives the Narrative
December 4, 2018
Last update: August 2021
Every effect needs a cause. Sweet-sounding and simple explanations make humans feel good. But never forget that the narrative doesn’t drive price. It’s the other way around.
Price drives the narrative.
On Monday global markets skyrocketed. That was the effect. Now, we need a cause. The meeting between President Trump and Chinese President Xi Jinping ended with a 90-day cease-fire agreement to the ongoing trade war. Sounds like a pretty big deal. So, yeah, why not? Let’s call that the cause.
Go look at any major financial news outlet from Monday and you’ll find headlines galore touting the weekend agreement as the reason for higher prices.
Fast forward to this morning and the futures are trading lower premarket. Like a good little cause-seeking human I headed over to CNBC to identify why selling pressure arose overnight. And do you want to know what the headline was that greeted me?
“US stock futures fall amid doubt over the US-China trade deal”
Wait a second. I thought the markets were rallying on optimism surrounding a potential deal!? Now they’re falling on doubt over the deal?
What a fickle game this is.
In a parallel universe, the markets fell on Monday following news of the agreement and do you know what the headlines were?
“US stock futures slide amid doubt over the US-China trade deal”
But then, the very next day the markets were rallying hard and guess what the news was?
“US stock futures rally on optimism over tariff cease-fire”
In both universes, the news was the same. The difference was the stock market’s price performance. And that is ultimately what drives the narrative or story. If the news appears good, but prices fall it is due to doubt or skepticism of the positive news. Otherwise, positive news equals market rally. Duh.
This is why there is zero edge in having news drive your decision-making. When the same news causes prices to rise in one instance but fall in another, it is beyond useless.
And yet, perhaps “useless” is too strong a word. I will say that the one redeeming quality of news is it raises your situational awareness. This is something discussed in-depth in our oh-so-enlightening Bear Market Survival Guide. I see commentary on interest rate trends, bond prices, the length of the economic expansion, inflation reports, and so forth when I read the news and these keep me abreast of data that isn’t readily available by looking solely at a price chart.
So to that extent, news is good. But if you’re scouring the headlines to divine the future of market prices or discovering the why behind market movements, stop it.
My inner technician demands I remind you all that prices rise because demand is greater than supply. And vice versa for prices falling. It’s ridiculous to argue that the millions of investors who buy and sell on a daily basis are doing so in response to a single news release.
Your skeptical of news friend,
Tyler.
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Great point – makes sense!
Cheers!
Ever since the first time you mentioned how “useless” the news was for anything other then situational awareness, it has made trading much simpler. Way to go Tyler!
Very thought provoking… will put into practice more
So true. Unfortunately the sellers of news demand a cause, and the hapless reporter’s job is to discover something, or invent one that sounds plausible. The cheaper the news source, the more inventive they are, and it’s always wise to remember that the primary job of free media is to sell advertising – they represent the seller of goods, and are under no obligation to provide the consumer with the unvarnished truth. Same goes for politicians.