Rumors serve as market barometers
Commentary: Rumors act as a symptom of market woes
By Tomi Kilgore, CBS.MarketWatch.com
Last Update: 12:02 AM ET April 15, 2002
NEW YORK (CBS.MW) -- Rumors may be contagious, but they don't make the market sick.
FRONT PAGE NEWS
Dow stays negative while Nasdaq regroups
FBI warning closes downtown Washington banks
Feds probe Army Secretary White's Enron stock sales
SEC, N.Y. attorney looking at H-P vote
Sign up to receive FREE e-newsletters:
Get the latest news
24 hours a day from our 100-person news team.
That doesn't mean they shouldn't be acknowledged -- quite the contrary. They are a very clear symptom that something may be wrong.
In the latest week, it seemed every big move down was attributed to a rumor, be it a hedge fund blowing up, a tech company warning or a mutual fund unloading.
Over the years, I've gone from abhorring the market's rumor mongering to embracing them as another indicator of market health.
The way I see it, the market won't move on a rumor unless it was already leaning in that direction.
How it spreads
Wall Street traders like to tell rumors, because it shows they know what's going on. Others like to hear them, because it makes them feel they're on the inside. And confirmation is never needed, since the market's movement is evidence enough.
A rumor wouldn't spread if the market wasn't moving because no one would listen. The speed at which a rumor spreads is an indication of the market's need for justifying that direction.
Or course, people have to suspect there is fire before they even look for smoke, so a rumor has to be believable. But if they suspect there is fire, then the market may already be in trouble.
Investors need a reason for movement
Investors need to know why a market's moving. It reassures them that fundamentals, rather than nebulous speculation, are still driving the market. They also need to have something to blame when they lose money.
Unfortunately, there isn't always a clear reason for every market blip. Sometimes, it's just a bunch of people that by coincidence happen to be doing the same thing at the same time. The market may move enough to trigger "stop loss" orders, which adds to the volatility. And telling someone they were "stopped out" for no reason is never very pleasant.
Investors may scoff at a rumor, and curse the market for acting on it, but at least they have something to blame.
IBM's example
Something else to watch for is how the market reacts to the denial of a rumor. In a perfect world, the market should return, if not surpass, pre-rumor levels. If it doesn't, it suggests the market wanted to move in that direction anyway, and just needed an excuse to pull the trigger.
Although it wasn't really a rumor, recent trading in IBM was a good example of what I mean. Last Thursday, a 5.4 percent slide in IBM (IBM: news, chart, profile) was attributed to a report from a private research firm that said the company was a target of an U.S. Securities and Exchange Commission. See full story.
The SEC uncharacteristically commented on the report, saying late Thursday that it opened an investigation but closed the case "shortly thereafter" without taking action (read more). The stock rallied $1.41 to close Friday at $85.60, but it was still well short of Wednesday's closing price of $89.01. (Zoom in on interactive java chart.)
Perhaps IBM's profit and revenue warning last Monday, which sent the stock tumbling 10 percent, has something to do with its failure to recover those losses.
So what is the cause for the recent rash of rumors? Is it just a case of movement making reality, or is something else involved?
Recovery anxiety spreads
The recent rally in the eurodollar futures (or decline in implied three month rates) has coincided with uncertainty over the strength and sustainability of the current economic expansion. As of Friday's close, June futures implied a three-month dollar deposit rate of 2.25, which is about 35 basis points below the highest level seen in March. Meanwhile, the futures have run into a "congestion area," which may limit further advances.
One key assumption of chart watchers is that participants of market battles, especially the losers, have long and vivid memories. The bigger the battle the more ingrained it is in the minds of those involved.
For the month of February, June futures seesawed within a range of 97.644 and 97.85 (implied rates of 2.356 percent to 2.15 percent). A close look at intraday activity reveals wide spreads between intraday highs and lows, and the opening and closing prices, suggesting spirited fighting.
Bulls that remained stranded on that battlefield will likely jump at the chance to escape, while those that had already cut their losses will be afraid of betting on declining rates again.
The S&P 500 Index ($SPX: news, chart, profile) has also been suffering from recovery anxiety of late. Not coincidentally, the broad market barometer has joined the eurodollar futures market by returning to its February battleground, closing Friday at 1,111.01.
During that month, while the bulls and bears staged an epic battle over Enron-related concerns and emerging evidence of a recovery, the S&P 500 was whipsawed from a high of around 1,130, to a low of 1,078, back to a high of 1,125 and then right back down to a low of 1,074. The outcome was uncertain until March 1, when the index broke out of the range by rallying to 1,154. (Zoom in on java chart.)
Will history repeat itself, or will the bears win out this time? Don't forget to keep checking the rumor mill.
Tomi Kilgore |
