Why is that markets have recently been ignoring bad data?
Answers
4085 points
EthanR answered 11 months ago …
The markets right now are in bullish mode, due partly because they were so oversold already, partly because of the holidays, and partly just optimism that maybe a new administration will figure out some solutions to our current dilemmas. Many people say it's just a bear market rally, but whatever it is, the market will ignore bad news when its in bullish mode, because the desire to buy stocks is greater than the fear surrounding the bad data.
Conversely, in a bear market, sometimes decent news sometimes gets overlooked.
348 points
Sensei answered 11 months ago …
The answer to you question centres around what you mean by "bad" data. Bad compared to what? Last year's data? Anticipated current year's data? Expected next year's data?
It's generally believed that markets are anticipatory. Stocks trade on what is expected. And if the expectations are low enough, the bar is easily crossed. The economy is so bad that "investors" expect very little so, even if earnings are crushed (or even if the company reports a loss), the result may be "better than (not as bad as) expected". Moreover, P/E ratios have been decimated in the last year or so and that means that it's easier for the stock to rise even if its "data" is bad.
In addition, even if the results are horrid compared to prior years, there may be an anticipation (rightly or wrongly) that "the worst is over" or that the company's fortunes are "turning around". As Alexander Pope wrote, "Hope springs eternal ..."
Another way of looking at it is to consider a strong bull market. If the company beats "expectations" by a penny ... big deal. The share price might rise slightly (or even fall) because in a strong bull market the anticipation is so great. And if they "miss" by a penny ... disaster! Think about that ...
If a $36 stock has a 10 P/E, it should make about 90 cents a share per quarter. If they report 89 cents, the stock should fall by about 40 or 50 cents, right? But in reality, it might fall $3 or $4 dollars. What?? That's 10%. Logically, ridiculous. But as you know there's no "logic" in the market. It is what it is.
The converse is true in a strong bear market like we have now. The company may have reported a loss of $1 a share, but if they were expected to report a $1.01 loss, then the "data", while bad, is better than expected and investors might think that the company is on its way to better times.
TD Bank announced a while back that it was going to do an additional financing. The stock got battered in anticipation. But when it was done, they announced that they raised the $250 million they needed. The stock was UP on the announcement and again the following day. It should have gotten slammed. What happened? Investors likely thought, "Huh? $250 million? That's ALL? We thought it would be twice that." The "data" was bad, but not as bad as they thought it would be.
So, I don't think markets are ignoring the bad data. I think they anticipated it and have discounted it already and the results aren't as "bad" as they'd thought so they're bidding the price up based on their hopes for the company's future.
117 points
JohnLansing answered 11 months ago …
I don't care how far and how fast the indices rally -- it's still a rally within a bear market.
And what many traders, with their bullish blinders on, fail to realize is that in a bear market, the rules are completely different.
One of the many myths of bear markets is that all the news is bad; therefore, stocks and the market itself will keep going down on bad news. So, if that's true, then how did horrible housing data, rotten retail numbers and cracking consumer confidence numbers translate into a 258-point market gain on New Year's Day?
OK, I'll give it to the pundits: All news is bad. But, that's the definition of a bear market! And just as surely as the market can't drop every single day (or else it'd be trading at zero), the market does go up on bad news.
But this is where you can get ahead of those talking heads on Wall Street and apply some logic to your portfolio.
Applying the rules of a bear market, then, a bear-market rally is simply a signal that it's faking its own death. Technical types call it a "counter-trend rally." And those who mistake a good day or three in the markets as the return of the bull market are going to be among the first casualties.
Remember, nothing goes straight up or straight down. What's important is to know the trend -- in this case, we're in a downtrend. And just like we're stair-stepping downward, when the trend turns and we return to bull territory, it's going to be an equally rocky climb on the way back up.
