TRADING AND THE PITFALLS 
OF MISSINFORMATION
by Ghassan Abdallah, Ph.D.
November 15, 2007

One of the things that I hear repeatedly is how difficult, if not impossible, it is to trade the markets successfully. Many have lost their life savings and sanity pursuing that endeavor. Others, however, have been able to overcome losses, learn, adapt, and prosper. Traders who want to last must adhere to the two most widely known Wall Street principles of letting profits run and cutting losses short. However, besides utilizing proper risk management techniques, traders must have another trait that is yet to be adequately addressed by the trading literature. The successful trader must have an uncanny ability to utilize information. In other words, a successful trader’s ability to digest information and act on it must be beyond what is normal or expected. 

Most of the information we get from the various media sources is noise and should not be a factor in trading decisions. What I am referring to here are headlines that can be used to justify either a rally or a sell off. During September reports of severe losses by big money center banks and brokerages due to the housing meltdown were greeted with a bout of buying. Headline: Bank loses $4 billion. No problem, “the bad news is out of the way,” reported Bob Pisani of CNBC as the financials rallied. Move forward a few weeks to November 2007. Headline: Bank Announces $7.9 Billion of Mortgage Related Write Down. This time around the bad earning news from the financials was deemed as bad news and used to explain the selling in financial stocks.

The nonsense of course does not end with the above-mentioned example. Here are some of my favorite Bullish/Bearish headlines:

1- WEAK ECONOMIC DATA.

1. Increases the chances of a Fed rate cut and the markets rally.

2. Slower consumer spending and the market sells off.

2- OIL PRICES RISE TO ALL TIME HIGHS.

1. Good for energy stocks and the market rallies.

2. Bad for consumer spending and the market sells off.

3- THE DOLLAR PLUNGES.

1. Good for multinationals and the market rallies.

2. Bad for inflation and the market sells off.

What causes the markets to go up or down in both the short and long term are a variety of complex variables and not a specific news event. That does not mean that news does not always matter. When does information matter? The news tends to matter and move markets when the information is unexpected. For example, the Fed’s decision to cut interest rates by a half point in September was a market-moving event. The meeting of the Federal Reserve itself was scheduled and was not a surprise. The decision to cut the Fed fund rate was not a surprise either. The surprise came in the size of the cut, a significant half point. With market indexes only a few percentage points below their historic highs and the U.S. Dollar index at historic lows very few ventured to bet that the Fed would be aggressive in cutting rates. That unexpected event provided the perfect setting for any trader whose position was 100% cash prior to the announcement to trade the market on the long side at least for a few days. The problem is that the Fed does not surprise every day—a surprise fed rate cut and other major market moving events are rare. Without such easily interpreted market moving news events a trader is left to navigate a perilous market with a lot of noise and little salient news. So what is a trader to do in the absence of tradable information? First and most importantly be aware of the general market trend and key support and resistance levels of the S&P 500. As in most instances, the market moves first and the news explaining the move comes second. 

© 2007  Ghassan Abdallah, PhD
Editorial Archive

Contact Information
Ghassan Abdallah, Ph.D.
832-767-3807
Email