The Most Ridiculous Chart of 2012

There was a chart making rounds yesterday, which showed the S&P 500 index ($SPX) with and without the Twenty-four Hour Pre-FOMC returns. I found this chart to be ridiculous, even if it was constructed by economists at the Federal Reserve. Here is why.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First off, do you notice which level the S&P hits at the very low of the 2008 financial crash? The line goes BELOW ZERO. Now, who actually believes the S&P would have traded that low, let alone below zero (dont think that’s even possible). The amount of value in the market at the real March 2009 low was immense. The S&P at zero would probably mean many blue-chip companies would be trading near or at cash value. Now I’m not fundamental analyst or investor, but if strong companies like IBM ($IBM), Mcdonalds ($MCD), Coca-Kola ($KO) and Microsoft ($MFST) are trading anywhere near their cash values, then that is a steal of a millennium (which means it will never happen). Major funds and billionaires would be jumping in way before the market got that low, thus zero is an unrealistic scenario.

Second, do you realize what they just did? They got an event, and said without this, the market would be lower. Well, that may be true, but as a trader/investor, this is pointless information. I can flip that around and state: “Without the European debt problems, the S&P 500 would be at new all-time highs”. Now my statement may be true, but it really does not matter because it is not reality. Because we deal with real things, we must adjust for them.

For example, you might not like the Federal Reserve ($FED) and how they effect all markets. However, if you are a trader/investor, you cannot deny their effect over said markets. To be short bonds as the Fed lowers rates would be a suicide attempt. You do not fight the Fed and that is the reality of the markets. Same thing goes for other realities. You might think we have decoupled from Europe fundamentally, however, if you trade/invest, you cannot deny the effect they still have over the US markets. That is again, the reality of the markets.

The Last thing that bugged me about this chart/analysis is that it assumed the market would trade in the same trend as it did in reality. Would the market have set the low in March 2009 again? Would we have seen a monster rally off that low? Would the flash crash have still happened on May 5, 2010? Etc & etc… You just cannot assume that the outcome would have been the same. Since the market would be trading at much lower levels at the time of the 2008 financial crisis, would the sell-off still have been as big (%-wise)?  Would the market have found a floor much sooner? All of these questions remain unanswered and thus it is hard to determine how the market would have turned out had there been no “Pre-FOMC drifts”.

 

Tags: $MACRO $FED $SPX

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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