Monday, June 22, 2009

Why there will always be money to make in the market

The markets are clearly not 100% efficient. There is a large swath of the populace which seems to read headlines, want a three-sentence synopsis of an event, and then rush to make a buy (or sell) decision based on this limited view (combined with some emotion as to what the stock prices were doing before the purchase).

I think a prime example of this would be current reaction to housing headlines. Since time immemorial, house prices have held deeply seasonal patterns. Prices rise more quickly in the summer (or decline more slowly) and then rise less (or decline more) in the winter. It has always happened that way. Yet people take the latest housing data and focus on how the rate of sales decline has slowed and how the rate of price decline has slowed, and conclude that the market has bottomed. Nothing I have seen anywhere supports this. Consider this chart made by Calculated Risk:The seasonality is quite apparent, even through the rise of a stunning bubble and in the midst of collapse. This is part of that summer optimism which combines with a little boost from stimulus spending to make people think the economy has recovered. It has not, and there is money to be made here shorting home builders.

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