Comment on News Reactions

May 25, 2007: 9:04 AM CST

Investors certainly are skittish lately.  One of the biggest drags on the economy – many economists say – is the declining housing market and its effects on the American consumer.

With stock prices still advancing, bad economic news has had little effect on the general market, at least not to the extent expected.

We recently learned that new home sales surged the greatest percent in 14 years, indicating that the housing market may actually be stronger than expected, potentially removing this ‘drag’ on the economy and the consumer.  When the report was released, what did the market do?

The market sold-off dramatically after the initial report was digested.  What reason did the pundits give for this sell-off?  Many said that the fact that the economy is doing better than expected means the Federal Reserve will no longer consider lowering rates to ease the economy.

It was another classic “Good news is bad news” or “expect the unexpected” scneario that is so common to traders in the market.  Great news causes harsh sell-offs and dismal news causes rallies.  The reason is often attributed to interest rates, yet various forces (including stop-orders and nervous investors) help fuel the price movements.

Always keep both eyes open and question everything and remember that there is only one truth:  price.

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