Thursday, August 10, 2006

Is That Dog Barking?

One of the most useful clues to a market's underlying strength or weakness is its response to unexpected news. A market that doesn't drop in response to a piece of unexpected bearish news is headed higher. A market that fails to rally in response to unexpected bullish news is headed lower. I like to call this the "Dog That Didn't Bark" phenomenon.

This morning police in the UK broke up a terrorist plot aimed at airline travelers to the USA that was just hours from being carried out. This news spooked European stock markets and led to a lower open in the US stock market. I would have expected gold and silver to rally on the news, bonds to rally on the flight to safety, and oil to rally on increased fears about the Mideast supply when terrorists are active.

Instead, we saw stocks rally from the open in the US, gold and silver drop, bonds drop, and oil drop. That dog didn't bark! So I take this response to unexpected news as more evidence that stock prices in the US are headed higher along with bond price, and that gold, silver, oil are all headed lower.


Anonymous said...

Great blog! What are your thoughts of no rally dispite all this bullish news the last few days? We have fed pause, unemployement number & good earnings. Wouldn't you categorize this as a "dog that didn't bark"?

Anonymous said...

Why is it surprising that the US markets rallied on the news of a FOILED terrorist plot? Shouldn't this be expected? This is especially true after we saw the US markets open way lower after the London bus bombings. The markets eventually ended up in the black that day. Things weren't as bad as they could have been and hence that is good news and justification for a "rally."