The absurdity of apriori analysis of news

Hi all,

As forex traders, we know how financial news releases can shake up a market. Usually the price action makes common sense, but when the market (DOW or currencies) move the opposite direction one would expect, then the financial "analysts" have to have something to say, right??

I have to laugh sometimes at the absurdity of some of the news analysis the comes over the wires. I know it's no easy task to explain why the market does what it does, but sometimes it's just patently clear that the analyst is grasping at straws, trying to explain why the market did the opposite of what he/she would have predicted. This after-the-fact ("apriori") analysis isn't analysis at all but pure observation.


Today, at 10AM EST, the USD news "Pending Home Sales m/m" was released. The current month's news was bad, well below expectations, coming in at -2.6% vs. -0.7%. Ordinarily, you would expect the DOW to fall on such bad news yet it rose, prompting this explanation on http://finance.yahoo.com :

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Stocks Rise After Poor Housing Data
Tuesday January 8, 10:46 am ET
By Madlen Read, AP Business Writer
Stocks Up After Report Indicates Drop in Pending Home Sales, Bolstering Argument for Rate Cut NEW YORK (AP) -- Wall Street advanced Tuesday, trying to rebound from a dismal start to 2008 as investors bet that new housing data will give the Federal Reserve more reason to cut interest rates.
...
========


Oh but wait!!! By 12PM EST, the Dow had reversed and fallen, leading to the next brilliant analysis release:


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Stocks Dip on Housing Industry Woes
Tuesday January 8, 12:37 pm ET
By Madlen Read, AP Business Writer

Stocks Slip After Reports Indicate Drop in Pending Home Sales, Problems at Countrywide, KBHome NEW YORK (AP) -- Wall Street turned lower Tuesday, giving up early gains as investors still hoping for an interest rate cut struggled with the ongoing fallout from the mortgage and credit crisis and the possibility of further troubles at lenders like Countrywide Financial Corp.



The National Association of Realtors said Tuesday its index tracking pending U.S. home sales fell 2.6 percent in November, a larger decline than the market expected. The housing market has been the main drag on the economy recently, and is one indicator the central bank is watching to gauge the likelihood of a recession.
The home sales report followed last week's disappointing readings on employment and manufacturing. The stock market has been attempting to recover from sharp losses in the first few days of trading in 2008 on the expectation that the Fed will continue its campaign of rate cuts to prevent the U.S. economy from slipping into a downturn.
But jitters about Countrywide, which Lehman Brothers said has seen a "dramatic decline" in earnings power, and KB Home, which posted a disappointing fourth quarter loss, kept Wall Street on edge.
...
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To me, the Housing Data was bad... so why did the market rise? Probably because of the huge adjustment in the PREVIOUS month's data that more than offset the latest month's shortfall.

Prior to release:

Expected this month: -0.7%
Previous month reported: 0.6%

Actual, this month: -2.6% (in other words, -1.9% further below expectations)
Previous month adjusted: 3.7% (a positive change of 2.1%)

If this month's expectation was -0.7%, the NET effect of today's news plus the correction was a +0.2% above expectations, as if it were "-0.5%". That would be my guess as to why the market's initial reaction was favorable. IMO, pulling out the "hoping for rate cuts" card is another way for analysts to say "I have no idea why it went up but it did."


Pips4life

Here's the full text of the reports on http://finance.yahoo.com (which are changed throughout the day; I happened to have the older version open in a browser so I could compare them):



http://biz.yahoo.com/ap/080108/wall_street.html

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Stocks Rise After Poor Housing Data
Tuesday January 8, 10:46 am ET
By Madlen Read, AP Business Writer
Stocks Up After Report Indicates Drop in Pending Home Sales, Bolstering Argument for Rate Cut NEW YORK (AP) -- Wall Street advanced Tuesday, trying to rebound from a dismal start to 2008 as investors bet that new housing data will give the Federal Reserve more reason to cut interest rates.The National Association of Realtors index that tracks pending U.S. home sales fell 2.6 percent in November, more than the market expected. The housing market has been the main drag on the economy recently, and one indicator the central bank is watching to gauge the likelihood of a recession.



The advance extended a rally that started Monday, when stocks closed mostly higher on hopes the Fed will continue its campaign of interest rate cuts to prevent the U.S. economy from slipping into a downturn.
Philadelphia Fed President Charles Plosser said in a speech that inflation remains a concern to the central bank. On Tuesday, gold prices surpassed their 1980 levels and reached a record above $875 an ounce, while oil prices resumed their climb. However, Plosser said the Fed remains open to further rate reductions.
Investors also appeared pleased by talk of corporate shakeups at Bear Stearns Cos. and Starbucks Corp. Starbucks announced late Monday it was replacing its CEO, while media reports said Bear Stearns chief executive James Cayne was also planning to leave his post.
The Dow Jones industrial average rose 69.34, or 0.54 percent, to 12,896.83.
Broader indexes also rose. The Standard & Poor's 500 index gained 13.40, or 0.95 percent, to 1,429.58, and the Nasdaq composite index added 25.70, or 1.03 percent, to 2,525.16.
Oil had slipped in the previous session to a two-week low on worries about the U.S. economy, but on Tuesday, light, sweet crude for February delivery rose $1.92 to $97.01 a barrel on the New York Mercantile Exchange.
Bond prices weakened as stocks rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.89 percent from 3.84 percent late Friday.
The dollar fell against most rival currencies, except the yen.
Investors will be watching Bear Stearns to see if the fifth-largest U.S. investment bank will announce the resignation of James Cayne as chief executive. He is expected to retain the chairman title, according to a report in The Wall Street Journal, and to be replaced by Bear Stearns President Alan Schwartz, a 57-year-old investment banker. Bear Stearns rose 79 cents to $77.04.
The report came after Starbucks Corp. -- the world's largest chain of coffee shops, which has seen sales plateau -- announced late Monday it replaced its chief executive officer with former CEO and Chairman Howard Schultz. Starbucks rose $1.64, or 8.9 percent, to $20.02.
KB Home, one of the nation's biggest builders of single-family homes, reported Tuesday that its fourth-quarter losses ballooned as sales slowed. The company also booked charges to write down unsold inventory.
KBHome fell 43 cents, or 2.4 percent, to $18.05.
Overseas, Japan's Nikkei stock average closed up 0.19 percent, and Hong Kong's Hang Seng index fell 0.25 percent. Britain's FTSE 100 fell 0.20 percent, Germany's DAX index added 1.08 percent, and France's CAC-40 rose 0.96 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
===============



And then, later in the day after the market flipped direction....






==========
Stocks Dip on Housing Industry Woes
Tuesday January 8, 12:37 pm ET
By Madlen Read, AP Business Writer

Stocks Slip After Reports Indicate Drop in Pending Home Sales, Problems at Countrywide, KBHome NEW YORK (AP) -- Wall Street turned lower Tuesday, giving up early gains as investors still hoping for an interest rate cut struggled with the ongoing fallout from the mortgage and credit crisis and the possibility of further troubles at lenders like Countrywide Financial Corp.




The National Association of Realtors said Tuesday its index tracking pending U.S. home sales fell 2.6 percent in November, a larger decline than the market expected. The housing market has been the main drag on the economy recently, and is one indicator the central bank is watching to gauge the likelihood of a recession.
The home sales report followed last week's disappointing readings on employment and manufacturing. The stock market has been attempting to recover from sharp losses in the first few days of trading in 2008 on the expectation that the Fed will continue its campaign of rate cuts to prevent the U.S. economy from slipping into a downturn.
But jitters about Countrywide, which Lehman Brothers said has seen a "dramatic decline" in earnings power, and KB Home, which posted a disappointing fourth quarter loss, kept Wall Street on edge.
Countrywide tumbled 15 percent in midday trading, pounded by the Lehman note as well as a New York Times report saying that court records show the home lender fabricated documents related to the bankruptcy case of a Pennsylvania homeowner. Many traders have been betting in recent months that the lender might need to file for bankruptcy.
"You can't ignore Countrywide as being a significant benchmark in the housing area," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research.
Meanwhile, recession fears have been thwarting stock rally attempts so far this year, Sparks added. "It's difficult to balance the ability to cut rates to stave off a recession with the stated goal that the Fed has to not spur inflation. There's a question out there -- can the Fed do enough?"
Philadelphia Fed President Charles Plosser said in a speech the Fed remains open to further rate reductions, but that inflation remains a concern. On Tuesday, gold prices surpassed their 1980 levels and reached a record above $880 an ounce, while oil prices resumed their climb.
The Dow Jones industrial average slipped 41.30, or 0.32 percent, to 12,786.19, after rising in early trading.
Broader stock indicators also fell. The Standard & Poor's 500 index dropped 1.44, or 0.10 percent, to 1,414.74, and the Nasdaq composite index lost 0.46, or 0.02 percent, to 2,499.00.
One of the most actively traded stocks on the New York Stock Exchange was Countrywide, which fell $1.19, or 15.7 percent, to $6.45.
And KB Home, one of the nation's biggest builders of single-family homes, reported Tuesday its fourth-quarter losses ballooned as sales slowed. The company booked charges to write down unsold inventory. KB Home fell $1.14, or 6.2 percent, to $17.34.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.86 percent from 3.84 percent late Friday.
The dollar fell against most rival currencies, except the yen.
Oil had slipped in the previous session to a two-week low on worries about the U.S. economy, but on Tuesday, light, sweet crude for February delivery rose $1.90 to $96.99 a barrel on the New York Mercantile Exchange.
Investors were watching Bear Stearns Cos. to see if the fifth-largest U.S. investment bank, which has suffered huge losses after losing bets on mortgages, would announce the resignation of James Cayne as chief executive.
He is expected to retain the chairman title, according to a report in The Wall Street Journal, and to be replaced by Bear Stearns President Alan Schwartz, a 57-year-old investment banker. Bear Stearns fell $1.45 to $74.80.
The report came after Starbucks Corp. -- the world's largest chain of coffee shops, which has seen sales plateau -- announced late Monday it replaced its chief executive officer with former CEO and Chairman Howard Schultz. Starbucks rose $1.83, or 10 percent, to $20.21.
Overseas, Japan's Nikkei stock average closed up 0.19 percent, and Hong Kong's Hang Seng index fell 0.25 percent. Britain's FTSE 100 fell 0.20 percent, Germany's DAX index added 0.42 percent, and France's CAC-40 rose 0.79 percent.
New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com
==================================

The majority of analysts are horrible traders as they keep trying to predict where the market can go so I wouldn't be surprised that they posted such garbage on yahoo finance.

If anything, your above analysis highlights the importance of being able to think for yourself in order to become a good trader.

After the news I was all over the headlines trying to figure out how was the market going to react to it. Because both the actual and the revision were huge.

It surely caught the markets backfooted and among the headlines I've read:

- Housing will weaken further (Bloomberg)
- Housing will be steady from now on (CNBC)

The stock market reacted well to the -2.6% / +3.7% until came the rumours that Countrywide was to file for bankruptcy. Then everything went out of control.

The poor guys at the newswires are having a tough time, I'm sure. As Wall Street. Today's Dow Jones was 1 inch from insanity. Or past insanity already.

My 2 pips