The history of financial markets that's never going to be written is the history of how wrong most day-to-day commentary on the future course of the market is. It's never going to be written because the task is too massive--and only getting more so, given how insatiable the appetite for financial news is--and because ultimately it would just be painfully repetitive. "On Monday, Mr. X, senior technical analyst at Credit Morgan Citichase, said that the dearth of trading volume and the fact that important technology stocks had broken through key support levels meant that the market would be trending downward over the next few weeks. But on Wednesday, a rally began that lifted Nasdaq prices to a new high." You could write a million sentences like that--though I promise I won't--about just this year alone.
Needless to say, the wrongness of the commentary is not evidence of how dumb most people commenting on future short-term market moves are. It's simply evidence of the impossibility of the task they have set themselves. You can't know where the market is going in the next week, not with any consistency, because, well, you can't know. The walk of stock prices in the short term is, to all intents and purposes, as random as academic economists claim.
But this fact is apparently a difficult one for most financial-news organizations to digest. Watching CNBC last week, for instance, you could have seen Bob Pisani, who does most of CNBC's reporting from the floor of the New York Stock Exchange, talk about how even the traders on the floor of the NYSE were confused about the direction of the market. He added words to the effect of "Since these guys do this all day, you'd think they'd at least know, but even they're perplexed."
Now, Pisani's a terrific reporter, with great sources, and he's always interesting to listen to. But the underlying premise of a lot of that reporting is that the people who are inside really do know not just what's going on but also what will go on. And that premise is just flawed. After all, if these traders really do know, with any certainty, what direction the market is going to take, then why are they still traders on the floor of the NYSE? Why aren't they on yachts in the Mediterranean?
It makes intuitive sense that the people who are closest to the action would know the most, and there are some situations--insider trading, leaks about pending mergers, etc.--where insiders are able to profit from their status as insiders. But being close to the action doesn't make you any more able to see inside the collective mind of the market. To cite a well-known statistic, in any given year, around 70 percent of all mutual-fund managers do worse than an S&P 500 index fund, and over time the percentage of outperforming managers keeps shrinking. As Michael Mauboussin, investment strategist at Credit Suisse First Boston, points out, "in what other profession can the average guy on the street do better than 70 percent of those who are supposed to be the very best at what they do?"
Newspapers and Web sites and TV channels need to find ways to fill all those columns and all that air time, and they need to quote Wall Street people for the purposes of credibility. But it'd be nice if occasionally they quoted someone saying, "I think this is what's going to happen, but the truth is I don't really know, and no one else does, either."