How much of an effect does news (both good and bad) truly have on the market?

Ask a taxi driver anywhere, from NYC to Kathmandu, what they think about the price of oil, and youre likely to get a comprehensive answer, including an opinion about the Gold price and perhaps, the Bitcoin markets next rally. Information about commodity prices and their causal relationships is pervasive, and most people have not only an opinion about the market, but a forecast or two depending on the potential economic outcomes they perceive.

Several of my colleagues have written articles discussing some of the factors that influence Bitcoins price. What follows is supplemental insight based on my experience and understanding of markets and market instruments. The points I make are, therefore, not restricted to Bitcoin.

CCN

Pillars of Analysis

Most people believe that the cause of future, past, and present price movement can be discovered via one (or a combination) of the Three Pillars of analysis :

• Technical,
• Fundamental
• Sentimental Analysis

So, it is common for investors in the stock market to look for companies with good balance sheets and with plenty of demand for their products, and to then buy these stocks. Based on these strong fundamentals , investors would expect the stocks prices to rise.

However, fundamental analysis does not apply so easily in the Forex market, due to active speculation in currency price change, and also currencies inter-dependence. A currencys price changes for reasons other than simple fundamentals.

For example, a particular countrys strong economy may have a favorable fundamental influence on its currency, yet its Central Bank could be seeking to devalue its currency in order to stimulate the export market. Other Central Banks may have started buying the currency (due to the countrys strong fundamentals) as a foreign reserve. The increased demand for the currency will push its price up, thereby prompting the Central Bank to increase devaluation measures. Announcement of such quantitative easing would, in turn, prompt large institutional investors to take profit, thereby causing the currencys exchange rate to spike downwards. Hence, fundamental factors are at work but more complex market forces come into play with regards to a currencys price.

Technical factors strongly affect price. For example the S&P500 Index or Euro/Yen currency cross: if the market habitually takes profit at a certain price level then an event that pushes price above that resistance level may see investors and traders excitedly buy into the market, thereby igniting a rally. There may be no fundamental reason behind the rally, but only the breach of a historic technical chart feature that acted as a trigger.

With both commodities and stocks we also often see the influence of market sentiment. For example, when Apple (under Steve Jobs) was the darling of the media and investment funds, any announcement of a new product or release date would send the stock price rallying because the market had positive sentiment towards Apple Inc. its products, and its brand in general. Conversely, when the market harbors negative sentiment toward a company, not even favorable fundamentals can save it, e.g. Microsofts 12 years under Steve Ballmer .

So Talk About The News

Technical, Fundamental and Sentimental influences on price but where does News fit in?

Big price changes, such as a market crash or the start of a wondrous rally are believed to be sparked by something. This is, of course, undeniable, and it is a fact that market moves coincide with significant events. We receive information about that something via news the media whether the source is Twitter or CNN or CCN. So it is correct to say that the market move was preceded by the news. The news had triggered the market move, right? Yet, is that the same as saying that the news had caused the market move?

Most people would say Yes, good news causes price to rise and bad news causes price to decline. This seems logical and the causal relationship beyond question. Yet, a review of significant market moves and their associated news triggers, shows that so-called bad news can precede a rally and good news lead to a sell-off.

Here is the Gold chart showing the War Effect, whereby markets move in both anticipation of and at the moment of declaration of war. Several US wars and their effect on the market are shown. The inset charts have the Gold price annotated in navy blue.

There is no consistent correlation between the news announcement of the onset of war and the direction that the Gold price will take. In fact, it can be argued that the market just used the news trigger to either correct or capitulate the larger trend direction.

Bitcoin and its News

Note that the announcement of eBays consideration of Bitcoin preceded the rally starting 20 May, yet a definitive statement of Bitcoin acceptance by Dell (18 June) had little impact. eBay had a turnover of $16 billion in 2013, compared to Dells $56.9 billion .

We see in the chart above, that news events (good and bad) trigger market moves. However, the news itself does not go to market to buy and sell Gold or Bitcoin people do! Market participants actions of buying and selling in the market is what moves price. While this statement may seem to be stating the obvious, it asserts the point illustrated above, namely that news events act as triggers for market participants to take action in the market, but news itself does not determine market direction.

What, then, determines market direction? The collective action of buyers and sellers, of course. More sellers and the price goes down; more buyers and price goes up. The mass of buyers vs. sellers is determined not by the actual content of the news its relative positivity or negativity but by a more basic factor: the market participants collective sentiment, or social mood .

socionomics.net

By this logic, we can begin to understand how, despite plenty of positive news and widespread adoption, Bitcoins price has just kept on moving sideways if not trending downward. The communitys mood and the mood of Bitcoin investors is negative. Not of and in itself, but in sympathy with wider society. Hence, when important news events are announced on the wire, they act as catalysts for the direction the market was going to go anyway. regardless of whether its Dell Accepting Bitcoin or Ecuador Bans Bitcoin .

Featured image by Shutterstock.

Updated: August 12, 2014 at 6:51 am CET.