Markets 'Fail' to Get it Wrong

That title is a bit misleading, right? If the market were perfect we would all be long and making huge amounts of money each day, Facebook would be 100 and Apple would be 1000. That is clearly not reality for the 99% of us struggling to make a buck each day the market is open. The truth is markets are more tied to emotions and reaction than ever before, and in a way the price discovery becomes more efficient. However, there are situations when the market makes a ‘mistake' and misunderstands certain stocks or situations and punishes a name too much. This was the case recently with Eaton, an industrial company that posted some decent numbers while the CEO came out and said things were OK in their business going forward. Potash had earnings last week which were also misinterpreted, the stock sank but came back strong to close right near a multi-month high. When your eyes are open and you see these chances drop into your lap you make a quick but informed decision on this before the market corrects it. Mario Draghi brought out the bazooka on Thursday morning and continued into Friday. ‘We will do whatever it takes at the ECB to save the euro'. Powerful words, but we've heard such yapping before, right? It may seem like lip service once again but the markets are taking him at his word this time. How do we know? Take a look at gold the last few days. This is more than an oversold rally, the big move on Wednesday is sticking, price over 1600 an ounce. Further, the euro caught some interest at the end of the week as well as the ‘chatter' builds. Next week the ECB will have an interest rate decision as Draghi tries to keep the fire moving. Markets as we know move on news and when there is uncertainty we enter this risk off zone. Speaking of next week, the Fed has a meeting as well and will re-state their view of the dismal economy. They are unlikely to announce a move of any magnitude but may lean in that direction. A few choice words by Bernanke and Co. will do the trick. Let's face it – NOBODY knows what the Fed has left to fire at the economy. Even if they provide lip service enough like the euros that may be sufficient to clear out the negatives. But let's be clear: nothing the Fed does is more important now than the election and those in Congress. I am of the belief they will eventually come out with some substantial fire power to try and stoke the economy and jobs growth again. The result is likely to be moot but the market will react to the ‘attempt' and not the overall result. Does that make sense? Raising the confidence level can sure go a long way to lifting markets. Go back to Fall 2010 when the QE was first announced. The market rallied 40% or more over the next six months only to be stopped when the earthquake hit Japan. Did the QE help? The jury is out on the that one but did it matter at the time if you were making money as the market was rising? Of course not. The market was rising as more liquidity was coming in, if you were long stocks you didn't care the reason why or how it was happening. Pay attention and listen to what the market is telling you. The chart of the SPX and QQQ are showing some different patterns. Below check the charts and notes to see where we may be headed. Bob Lang is the Senior Market Strategist for option trading newsletter Explosive Options