Nov 052010

Yesterday I was surprised by the buying and I posed a question on Twitter asking why buyers weren’t interested after the FOMC statement but we’re interested the day after.  It didn’t make sense to me.  If the FOMC statement was bullish then why wait until the next day to buy at higher prices?

I like to ask myself such questions and try to get inside the heads of the buyers & sellers.  What are they thinking?  Why are they doing what they’re doing?  Etc.

And DiogoMattoso replied “No reason to look for reasons.”

On one hand, we can never truly know what is going on.  Why would someone would wait 24 hours and buy 20 pts higher?  They have their reasons and it’s not likely we’re going to figure it out.  It could be anything.  They could have waited to see the reaction.  Their boss could have told them to buy.  Their client could have told them to buy.  They could have sold off a bunch of stocks and are hedging their stock sale.  They could be spreading.  They could be buying to push up price so they can sell their entire portfolio at a higher price.  They could expect ES to reach 1300 in the near future.

The bottom line is we can’t know.  So what’s the point of asking why?

After DiogoMattoso kindly put me in my place, I started noticing lots of people on Twitter were doing the same thing.  Here are a few examples:

If we didn’t drop today bcuz of treasury securities purchases & tomorrow’s settlemt date, will we cont. up tomorrow ?

This person makes an assumption and then is looking for confirmation of a hypothesis based on that assumption.  They said “we didn’t drop today because of X”.  Is that really why we didn’t drop today?  I know only one reason that is a fact on why we didn’t drop today – Sellers were not more aggressive than buyers.  The market can only move down if sellers are more aggressive.  But why weren’t they more aggressive?  We cannot know the answer to this.  And would it help us if we did?

Perhaps why we didn’t drop today as expected. [and then gives a link about the POMO]

This person offers a reason why.  Is this useful?  What if the reason is the POMO?  What if it’s not?

Those are just a few examples.  Once I became aware of “asking why” I started noticing just how often it occurs.

I actually ask “why” a lot in order to come up with tradeable hypotheses.  I’ll have a few more words to say on this topic in a future post.  For now I’ll just say that we should be careful when asking why.  If it’s to form a tradeable hypothesis then I think it’s ok because the hypothesis will be proven correct or incorrect.  But if it’s just to speculate on the reason “why”, then I think it’s not useful.

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