Headlines are to news what trading is to investing

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Being a reader of energy-related news sites (obviously) you are no doubt aware that commentary about daily market activity is a mainstay of energy reporting. This is logical because we want to understand movements in commodity prices, production or other energy statistics, and perhaps even the second- or third-order factors that explain volatility. We like to imagine that we can understand markets, it makes us feel better when looking at decimated portfolio statements. But fundamentally we can’t, and sometimes headlines dangerously imply that you probably could if you weren’t so stupid. However, if you don’t understand it all don’t feel bad at all; just try to interpret the following sequence which appeared simultaneously on a Reuters Business page (“Latest Headlines” screenshot from January 26, 2016):

  • Oil rises towards $31 on hopes of deal to tackle glut
  • Stocks fight back as oil pinballs back above $30
  • Crude drops back below $30 as Iraq adds record output

 

Obviously markets change fast, and the speed of news coverage dictates that reasons be given for the movements. But then the question is, who provides the story lines?

Somehow the responsibility for explaining daily market fluctuations has been handed over to market participants. That’s not profoundly irrational, but if that’s the way it’s done we should at least have an eye out for the corresponding dangers. Since these market participants consist mostly of either traders or those who watch/follow traders, isn’t the fox guarding the hen house? Are the people responsible for explaining the activity incentivized to exacerbate the activity?

Perhaps few care who provides the commentary, or maybe even feel better if the direct market participants themselves explain things on the expectation that no one else would know better. But there are inherent dangers in that process, beginning with time-starved reporters who require prompt explanations due to the rapid pace of market action (it must indeed be annoying to publish a piece at 10 am explaining why the market is up only to see the market reverse direction by the time the news is disseminated), and ending with traders who are, to put it mildly, rabidly interested in volatility, and in particular the direction of that volatility.

News agencies (or more accurately, reporters) often have go-to people that they can count on for a quote on short order to explain what’s happening. Well who wouldn’t, it’s hard to report on things otherwise, and those on the front lines would know best.

But a bit of caution should be in order, either in talking to the direct market participants or their close followers.

Traders have agendas, especially hedge funds. A hedge fund may make a bet that the market will move in a certain way, and if one of the major news outlets calls for a commentary on why the market is moving in that way, is it illogical to consider that the resulting quote may just happen to fuel the volatility or trend? On the other hand, it may be totally innocent from a trading perspective, where the quote comes from someone that doesn’t have a bet on, but that doesn’t mean there is any objectivity there. Commentators often have a vested interest because of past public statements made under the guise of a market expert; if you’ve been seen in the media as taking a strong stance on a market-moving point, will you venture forth with a viewpoint that directly contradicts past ones if it turns out the initial reading was false? That’s pretty hard to do, and maybe even impossible, because the reporter may not want to quote a source that openly contradicts themselves every few weeks.

But that in a way is the point of taking daily commentary with a grain of salt, or ignoring melodramatic adjectives and headlines. Daily news feeds are only of value to traders, and/or those who understand how traders play the game. It may be interesting to read a comment like “The worst fears of OPEC and Asian gas exporters are about to come true.” In conjunction with recent US exports of oil and natural gas, but it may be far more useful to think about the background and context of the article rather than taking it literally. It wouldn’t be hard to imagine the reporter in question saying, well, don’t take that literally…but isn’t that the point of the news?

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