It's often said that it takes two views to make a market and of course, that’s true because a buyer and a seller need to interact for a trade to take place.
And it’s the continuous repetition of that process that creates a liquid marketplace,
By definition, we would expect the buyer and seller, of an instrument or commodity, to have opposing views, or at least views that run at a tangent to each other.
Modern markets are made up of millions of opinions and views these views are expressed through trades, thousands of them.
For example, 6.39 billion shares changed hands on the NYSE on the both 29th and 30th of May and they weren’t busy trading days.
Three wise monkeys
The views that traders hold are influenced and driven by things that they see, hear and read.
Unfortunately. few things in finance and the markets are straight forward and as author Mark Twain famously quipped:
“There are lies, damned lies and statistics”
So we need to become adept at looking behind the numbers or at least thinking about what the numbers really mean.
That’s one of the reasons that I like looking at market internals and not just the headline index change.
I tend to check out the advance-decline data, how many stocks were rising, how many were falling and the volumes associated with each camp.
What about the number of new highs and lows posted in the session?
And the number or percentage of stocks that sit above or below key moving averages.
And perhaps most important of all what has the trend been, if any, in these data points?
Digging into this type of data can provide a better understanding of the real mood of the markets.
Here’s an example of misdirection taken from Twitter/ X involving the stock du jour Nvidia posted after the close on 03-06-2024 by Eric Balchunas.
“Nvidia has seen more $ volume today than the next 5 most traded stocks combined. Very unusual for one stock to be this far ahead of the pack.”
Source: X
Thats sounds very interesting doesn't it, you might think it says a lot about trading in Nvidia in that session and beyond.
But does it?
Because if we dig a bit deeper we find that Nvidia traded just a fraction over its average daily volume of 43.75 million shares on June 3rd.
And if we rank the S&P 500 stocks by the % of volume traded over and above their daily average volume then Nvidia ranks 250th at just +0.20%.
Critical thinking
It's not just market data that we can and should dig into we should apply similar techniques to media headlines and research.
Not that every headline or piece of research is deliberately misleading far from it.
However, in almost all cases the authors will have an axe to grind or a point to get a cross and both journalists and analysts are in the sales business, whether they know it or not.
Let's take two headlines/articles as examples of what I am talking about
Firstly from the UK Daily Telegraph which recently proclaimed:
“Nvidia, now worth more than (the) entire FTSE 100”
The inference here is that the AIU chip maker was “bigger and better” than the whole of the UK stock market or at least the greater part of it.
Yet at almost the same Citywire, the well-respected journal that covers the global asset management industry carried a story under the banner:
“Maybe the UK isn’t so bad! FTSE beats S&P over three years”
Source: Citywire
So which of these stories is correct? Who if anyone is trying to pull the wool over our eyes?
The truth is that both stories are correct:
Nvidia has grown to have a market cap greater than that of all of the UK FTSE 100 companies combined, extraordinary as that statistic is its true.
Yet it's also true to say that the FTSE 100 has outperformed the S&P 500 in local currency terms when measured by total returns - Total returns are a combination of stock price gains (or losses) combined with dividends buybacks and other distributions.
It's also true that the picture would look very different if those returns were calculated in US dollars.
But for sterling-based investors, the FTSE has provided some rich pickings over the medium-term.
Take, for example, this list of leading UK equities ranked by 3-year % change-descending.
Source: Barchart.com
As traders, we need to get used to looking beyond the soundbytes and the attention-grabbing headlines and not take them at face value.
We need to form our own opinions from data and seek out contra views to test those opinions against.
A word of warning though my wife can't watch the main news bulletins with me anymore, because I won't stop correcting what they say.
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