Is The Brexit Debacle Going To Crash The Market... Again?


Sentiment Speaks: Is The Brexit Debacle Going To Crash The Market... Again? 

Here’s a contrarian view! 

News flows can sometimes get us confused.

The market rallied strongly after the recent Brexit debacle when most expected the opposite.

The substance of the news is not as important as many believe.

We are often directed to think that the market reacts in the same manner as Newtonian physics. We believe that a news event which accompanies a market move was certainly the “cause” of that market move. But, how often have we seen markets react in the exact opposite manner in which the substance of the news event suggests?

While science has moved away from Newtonian physics, stock market analysts have not.

Wednesday, we saw a perfect example of this conundrum.

For most of the day on Wednesday, the media was warning us about the disastrous effects that a failed Brexit vote would have on markets around the world. We were told all day about how devastating the impact of a failed vote would be on financial systems that need stability. And, when the vote failed, market participants around the world held their collective breaths and braced for the worst.

Yet, the market has rallied 30 points (as of my writing this update) after this supposedly “devastating” occurrence the prior day. How is this possible?

Newton formulated these laws of external causality into his three laws of motion:

  1. a body at rest remains at rest unless acted upon by an external force; 
  2. a body in motion remains in motion in a straight line unless acted upon by an external force;
  3. for every action, there is an equal and opposite reaction.

Yet, even though physics has moved away from the Newtonian viewpoint, financial market analysis has not.

R.N. Elliott presented this perspective quite well back in 1946:

Many services and financial commentators in newspapers persist in discussing current events as causes of advances and declines. They have available the daily news and market behaviour. It is therefore a simple matter to fit one to the other. When news is absent and the market fluctuates, they say its behaviour is “technical.” 

Now, most of you will likely shrug this off and simply move on to the next event…….next weeks Brexit agenda, which is supposedly going to move the market. And, when you see an event which triggers a market move that is in line with the substance of the news event, all will return to normal in your prior world perspective. But, maintaining such blind sides will potentially hurt your investment account at the absolute worst times.

Just something for you to consider.