Even a cursory glance at how financial markets digest information quickly shows that they are erratic, and prone to either over or under reaction. The information process is not smooth and continuous; new facts, opinions, rumour, and news usually enters the market in a haphazard manner, after which the market reacts. This usually happens in a rather jerky and ill-defined way, this is where the information inefficiencies lie; and from these inefficiencies the bright, well informed and, yes once in a while the lucky, can profit.
One way to consider how information hits the market is to imagine a set of balance scales, with the pans holding piles of information; one pan holds any positive information about the market, the other anything negative. News, rumours and plain facts drop constantly into one or other of these pans, leading to an overall balancing position that represents the net emotion and thinking of the market. But there is a twist, our imaginary scales are sticky, so don’t always react straightaway when a new piece of data or information is dropped into one of the pans. Then quite suddenly the scales may shift as the ‘stickiness’ gives way. This is pretty much what happens when markets try to digest news, there is no smooth information flow; at the risk of stating the obvious the trick is to try and anticipate when the scales (i.e. the market realisation) suddenly tip and change.
The news and information is not important in itself, it is market the reaction, or lack of, that is the key. In markets it is often the tiniest movement or change, the lightest of last straws on the camels back if you like, that sets forth the cascading market move.
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