The Grand Unifying Theory Of Everything (Cestrian Stocks Bulletin #133)

Well, not everything-everything. Just some stonks stuff as usual.

If you want to ramp your page views on some stocks blog or other, it’s easy. Just assert that stock charts are a thing. That technicals matter to price. That fundamentals are just one input amongst many. That kind of thing.

Hit, “publish”.

Sit back.

Wait.

< …. >

BOOM! There it is. Blood boiling over, vitriol pouring in. Rage spittle flying. Not pretty. “Technical analysis is voodoo!” “You can’t make money that way!” “That’s just drawing any old lines!” - etc.

Now, if you believe that stock prices (1) follow faithfully their underlying company fundamentals and (2) respond to the news of the day then, congratulations, you are holding on to the last vestiges of Mister Rogers’ neighborhood whilst the world burns. Admirable. But not correct.

Now, to be clear, fundamental analysis is core to our DNA here at Cestrian. Grew up on it. Believed in it. Still do. But as an input, not as a whole answer. Last week we ran our first webinar within our Growth Investor Pro service and our approach to fundamentals - which we walked our members through - was well received and many were the compliments. And that’s nice of course. But for the whole story in stocks analysis, you have to include the technicals ie. the study of price and volume action independent of any other input.

Why is this? Surely the combination of study-the-company-numbers plus watch-the-news should do it?

Well, no. Because the news isn’t actually an input to stocks prices.

This point is well made by two images. This first is from April 2020. Say what you like about AOC, this is one awesome tweet.

And this we just drew - it relates to the events of a month back. After a long selloff, SPY bottomed the day Russia invaded Ukraine.

You can find table-pounding versions of, the news doesn’t matter, in two forms. The always-entertaining Avi Gilburt of Elliott Wave Trader, and the more somber Robert Prechter, he of Socionomics fame.

For some time now as a house we have utilized technical analysis alongside our fundamentals work. And since we’ve done so, our hit rate has improved materially. In addition, pure TA - specifically, our pure Elliott Wave & Fibonacci analysis method - led to us calling a top in the S&P500 and Nasdaq in November 2021, and then calling a bottom earlier this quarter. Doubt us? The contemporaneous notes are still in the service, as Growth Investor Pro members can attest. We use this high level market analysis to determine the appropriate level of risk appetite for the single-name stocks we cover. We outline the method in this public note of ours, published recently.

Empirically we know that news doesn’t drive stocks. We accept this for the fact that it is.

But it took us a while to realize why news doesn’t drive stocks.

It’s because the news already drove stocks.

Sorry, what now?

Like this. The news is only new to Joe P. Retail. Say it’s February 2022 and Joe is hearing on the news that Russia might invade Ukraine and that oil prices might go up. So, Joe buys a little USO or similar. But in doing so he notices that USO already moved up 15% or whatever in the three weeks before the news was reported. And indeed before he bought. What Joe is doing here is not setting himself up to win from a trend, but the opposite. He is helping Big Money liquidate the investments they made a few months back when Ukraine was not on the news, but the possibility of a Russian invasion was rising and the Masters of the Universe were well aware of the prospect, a result of the inevitable intertwining of money-people and politics-people around many fancy dinner tables in DC and beyond.

Because it turns out that - and surely this is no surprise - (1) powerful people know stuff before Joe P. Retail does; also, (2) powerful people own the media that Joe P. Retail consumes ergo (3) powerful people determine exactly what is news - be this in the old-world newspaper magnate bully-the-editor model or the new world social media bully-the-feed-algorithm model - so (4) the news isn’t news to powerful people and as a result (5) the news as experienced by Joe P Retail isn’t news to Big Money, which has long suspected X was going to come to pass and was busily trading in that direction months ago, before playing out the Grand Reveal that X May Happen Soon, whereupon Joe and his buddies place their Retail Street Bets and Big Money duly trades against them. Beautiful!

You see, if you sit back and think, well, the news isn’t actually all that new, it’s just stuff that bubbled to the surface directed by a Ms or Mr Big somewhere, then you quickly realize that of course the news doesn’t drive stock prices. In fact the news is usually just skating to wherever the stock already reached. And this is why so often - if you use Fibonacci analysis - events in the news appear to strike at just the level you would expect an index to reverse course. It’s not that some magickal alignment took place in the seventh dimension in order to align the 0.382 retracement of S&P500 e-minis with the first missile striking Kharkiv. It’s that retail’s selling climax, fuelled by fear of war, was exhausted at a typical emotional retracement level. Whereupon Big Money can start scooping up the bargain buys - since they already priced in their war risk because they’ve had several months to model it out - unlike Joe P Retail who just heard the news in the middle of his shift, moved to right from Defcon 5 (I’m Gonna Be Rich, Ma!) to Defcon 1 (Sell EEEVVERYTHING! AND BUY OIL AND AMMO) in the middle of his sandwich, then panic-sold growth stocks and panic-bought commodities all before the afternoon shift started. Which most likely won’t turn out to be such a great trading method.

If you invest according to the news, you cannot but be behind the times and you cannot help trading in mostly the wrong direction.

If you are a Ms Or Mr Big, you get to see the commercial a few months before the news-movie, and you can trade accordingly. Just one of the many non-tariff barriers facing Joe P. Retail in his quest to become just like those guys on Billionaire.

If you are a regular investor - not as dumb or as easily panicked as Joe but not as privileged as the Biggs - you don’t get to see what is coming up by meeting with ex-Presidents, but neither should you be yikes-selling in the middle of a CNBC talking heads session. You should be anticipating the news too. And stock charts can help you do that, because the chart is always sailing to the place where the Biggs believe the bad news will strike in a couple weeks. Not on the hourly, but if you zoom out on the daily or watch the weekly? You get a good sense of where things are heading.

And there it is folks. Why news doesn’t drive stock prices. Because you’re looking at the wrong part of the X-axis. Look back a few weeks or months. And you will see that there, right there, that’s where you can see the ripple that became a wave became a tsunami. The ripple was caused by Big Money, the tsunami destroyed Joe P. Retail’s home.

So as always we exhort you - don’t be like Joe P. Retail. Be like the Biggs.

As predicted loudly here, the market turned in late February and has been easy-up since then. In staff personal accounts in the last couple weeks we have done nothing much, just watched our holdings increase in value. And our ideas of the week, or lack of them, have reflected this.

However, enough is enough. You’ll see Three Ideas of the Week from us, this week. Stay tuned! And if you’re not yet a paying member of this newsletter, but you want those Ideas of the Week? You can join us here.