That is just too much information

LOOKING at the market reaction to recent events, traders could be forgiven for sitting in front of their screens, scratching their heads, unable to make heads or tails of anything. Whispers through the grapevine cause big moves in price, but official statements barely register. Perhaps traders are paying heed to the old rule of thumb that the best way to tell that politicians are lying is when their lips are moving.

But could the skewed market reaction to headlines be a form of bad news fatigue? Eurozone and US troubles have dominated the headlines for so long that they barely register. Talk of billions has given way to trillions and sovereign debt downgrades struggle to grab the front page.

TRADING ON FUNDAMENTALS
Perhaps traders are betting on what others will be doing instead of what this news implies will happen? After all, with Eurozone implosions, US debt ceiling bickering and sovereign debt downgrades coming thick and fast, market bears have hardly had time to catch their breath. But has this made it impossible to trade on fundamentals?

Ian O’Sullivan, head of sales for SpreadCo, takes the view that the market seems to look at news and rumours differently depending on what mood the market in general is in: “Sometimes when markets are in strong rally mode, bad news has little or no effect, and vice versa with sliding markets and good news.” O’Sullivan adds that there is so much information floating about so easily these days that the markets can get very skittish on rumours and “reports” but then react less to actual news: “The bigger-term technicals tend to hold, but shorter-term trends can get blown away so easily by rumours and hearsay, so trading with tight stops can become very difficult.”

CURRENT MARKET CONDITIONS
Angus Campbell, head of sales for Capital Spreads, backs up O’Sullivan’s views on fundamentals versus technicals in the current market conditions: “Despite what’s been going on, any FX market can be traded on technicals and so that will continue going forward, whether it’s the euro, yen, dollar or sterling.” Campbell adds: “Fundamentals can be useful for a more long term view that a currency is over or under valued, for example the US dollar which has been on a downward trend for the best part of nine years.”

Traders should be careful not to get caught up in market hype. And, in the current market conditions, perhaps traders should be aware of John Maynard Keynes’s quip that: “Markets can remain irrational longer than you can remain solvent.”