Why Do Markets Rally On Bad News And Fall On Good News?

By Avi Gilburt

This is probably one of the biggest conundrums investors face in financial markets today. A major report may come out with a very positive bias, yet the market will move in the opposite direction. How many times have you seen this happen?

Well, if you have any experience in the financial markets, then it has likely happened to you many times. But, most people simply shrug it off with platitudes like "they sold the news," or "the market is just not trading based upon fundamentals at this time."

But, have you ever really thought about why this happens, and happens so often?

In fact, there have been market historians who have reviewed many decades of news events and the reaction seen in the market. Yet, amazingly, they have determined that one cannot correlate these news events to movements in the market.

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years' worth of "surprise" news events and the stock market's corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

I know this seems quite counter intuitive to everything that you read on a daily basis, or hear in the news cycles. But, there are many other studies that have come to the same conclusion. And, if you did not shrug off the many times you have seen the same thing with your own eyes, and adopted the common platitudes, you may have come to the same conclusion as Mr. Walker.

Unfortunately, there are many fallacies which are propagated throughout the market, and the more you hear them, the more you believe them. But, what I intend to do in our chat room in our new site -- FATRADER.com -- is make you think about the market from an intellectually honest perspective, rather than simply shrugging off what you see with your own eyes. This will help you view markets as they are, rather than how you believe them to be.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.


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