Decision Quality Blog

This lead from a piece in the WSJ leads me to one or more of four possible conclusions. First, the quote . . .

Stocks and commodities plummeted on Wednesday as the euphoria that carried equity markets to massive gains a day earlier gave way to nervousness that the broader U.S. economy hasn’t yet escaped the dangers of the credit crisis.

The Dow Jones Industrial Average dropped 293.00 points, or 2.4%, to end at 12099.66, taking back more than half of Tuesday’s dizzying 420-point ascent. Those gains were driven by surprisingly strong investment-bank earnings and the Federal Reserve’s three-quarter-point cut in its key interest-rate target. But the deep selloff that followed was a sign investors are having second thoughts.

Traders had hailed the earnings surprises and Fed moves as building blocks in a possible long-term resolution of the credit crisis. But they’ve also cautioned that speculative money has exaggerated the price swings of various assets, that there is still a lack of conviction that the broader economic picture is improving, and that selling could quickly return.

The possible conclusions?

The first is that there is nothing regular people like you and me can discern from articles like this. Yesterday “the market,” whatever or whoever that is, were euphoric. Today, they’re apparently sullen and petulant. What changed in the space of a day? What new insight magically appeared that caused people to buy, buy, buy and then sell, sell, sell? No clues here.

The second is that It’s probable, even likely, that “the market” on Tuesday and “the market” on Wednesday actually describes completely different counterparties following very different strategies. Presumably one group was having tea while the other was screaming at their Bloombergs. And then they traded positions. If that’s not the case and we’re talking about the same people, they’re nuts and should be relieved of their jobs.

A third possible conclusion is that you can’t look at “the markets” through the lens of decision making as regular people understand decision making. I’m thinking now about people who are simply speculating and arbitraging vs. people who are buying and selling equities, bonds, and/or commodities for “real” reasons.

The fourth possible conclusion is that all this buying and selling has nothing to do with “the markets” and everything to do with the financial world’s equivalent of a garage sale. This latter point seems to be supported by at least one wag.

“When you see a lot of selling all at once like this across asset classes, it tends to make you think someone needs liquidity,” Michael Cuggino, president and portfolio manager for Permanent Portfolio Family of Funds in San Francisco, said, adding, “if people were looking to (Tuesday) as a turning point, I don’t think that’s so. People are sobering up.”

And the winner? None of the above. Or maybe some of the above. If you’re a true market pro, you didn’t read this anyway. You’re staging at your Bloomberg or else a glass of Bushmills (or maybe Thunderbird if it was a bad day). If you’re an amateur, I’d say stay out of the line of fire and hang out and hang on. You shouldn’t be trading in this market.

Tags: DowJones, Decision Making, Decision Quality, Bloomberg, Bushmills, Arbitrage, markets, speculation,