Market Swings Offer Opportunity

I am not a big NFL football fan but I do have a keen interest in statistics. I noticed that the betting line on today’s big game, as of last count, gives the edge to the Patriots. When the teams qualified two weeks ago it was Seattle that was favored. Is it possible that Seattle was actually the better team then, and New England is suddenly better now? Since betting lines are driven, not always by reality, but by those placing the bets, it is no surprise that opinions will rise and fall with various daily events. If a team reports that a key player has been injured, then the line would move against them. If that player happened to be the quarterback then that movement could be substantial.

On the other hand, if the third string kicker should have an injury, it would have little impact on the outcome of the game. But what if just such an injury resulted in the betting line moving significantly against the affected team? What if the loss of a low level player resulted in the odds moving six or seven points in the other direction? What would gamblers do in that situation? Clearly they would take advantage of the foolishness of the odds makers recognizing that a huge opportunity had presented itself.

Surprisingly, a similar situation occurs regularly on Wall Street. Almost on a weekly basis market indexes move in large swings after just a single bit of news that is perceived to be negative. Perhaps it was a comment by a member of the Federal Reserve. Maybe an economic report came in a little below expectations. Perhaps some key company issued a weak earnings report. Maybe there was a riot in Greece. Countless bits of information can have dramatic effects on stock prices, yet just as quickly these events become yesterday’s news as markets move on to the next headline.

Just as it would make no sense for gamblers to change their Super Bowl bets just because the Patriot’s water boy came down with a cold, it is equally silly for investors to react to the countless daily news items, the vast majority of which have no long term bearing on the markets.

There are certainly events that would likely change the outcome of today’s game, like Tom Brady Breaking his throwing hand on the way to the stadium. There are also major events that could change the direction of the economy. But with few exceptions, most news items are insignificant and have very little long term impact. Markets and investors seem forever chasing news that is not newsworthy.

Some of America’s greatest investors have long known this little secret of the markets. That is that most of the daily news, monthly economic numbers and Federal Reserve comments that so dramatically move markets, are really quite insignificant after all. By taking advantage of those movements, smart investors can cash in while others continue to worry about water boys and third string kickers.