Saturday, June 03, 2006

Explain this

The difficulty of short term prediction is made all the more apparent after one realizes how tough it is to explain market moves after the fact! Take Friday for example, it was widely assumed a weak Non-Farm Payroll (NFP) number was positive, as the “data-dependent” Fed was more likely to pause which is good for the markets (putting aside questions of that notion for a second). Well, the NFP number was a much weaker than anticipated 75,000, only half of what’s needed just to account for population increase. A closer inspection reveals a very weak reading for retail trade (-27k), continued deterioration in manufacturing (-14k), and a leveling in construction (+1k). The weekly hours worked was down 0.1, the hourly earnings up $0.01, and the weekly earnings DOWN $1.32(!). I certainly thought the report was a little “too weak”. Well, the market opened up so evidently it disagreed.

The initial drop didn’t come till 9:47 AM. The exact time was linked to the Iranian response to Thursday’s US proposal regarding the nuclear stand-off. It’s important to distinguish the trigger from the cause, but in the absence of contrary evidence, proximity in time deserves benefit of the doubt. Over the weekend, the Iranians seem to be softening their stance, does that mean the market will go higher now? I don’t pretend to understand Persian sensibilities, but recent developments seem to be buttressing the point made in this John Mauldin article:

..., if you really want to build a nuclear bomb, you do it quietly and then announce it when you have it, like Pakistan or India or North Korea. If you want to use it as a negotiating tool, you shout it to the world. The Persians have been skilled traders for 4,000 years, and they are working the West again.

At any rate, I don’t see the need to find negative reasons for Friday’s slight retreat in the Dow and Nasdaq. Advance/decline was 2 to 1 on the NYSE and 16 to 14 on the NASDAQ. New highs were more than new lows for both exchanges. Recall that Thursday was a nice follow through day. Despite my bearish views over the medium to long term, the near term is heading up if I have to hazard a guess. I would also have to point out that investors are again not showing much fear as evidenced by the drop in the volatility index ($VIX) two days after the 31% jump on Tuesday.

I don’t envy the financial journalist who has to explain the reasons behind every tick -- I guess someone has to do the job. Even I have to expose myself to the high frequency “noises” in order to have timely content for my blog. I just have to isolate my investment decisions from the vicissitude of my emotions. For my own portfolio, I’m going to sit on the sidelines for a couple of weeks, AFTER having already taken risk reduction measures.