General Information

What actually drives prices?

Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.

Liquidity is the expansion and contraction of money, specifically credit. It’s the biggest variable that drives demand in an economy. 

The federal reserve has the biggest lever on liquidity. This is why a trader needs to keep a constant eye on what the Fed is doing.

This is not to say that things like sales and earning don’t matter. They are still very important at the singular stock level. 

Very often the key factor is related to earnings. This is particularly true of the bank stocks. Chemical stocks, however, behave quite differently. In this industry, the key factor seems to be capacity. The ideal time to buy the chemical stocks is after a lot of capacity has left the industry and there’s a catalyst that you believe will trigger an increase in demand. Conversely, the ideal time to sell these stocks is when there are lots of announcements for new plants, not when the earnings turn down. The reason for this behavioral pattern is that expansion plans mean that earnings will go down in two to three years, and the stock market tends to anticipate such developments.

The market is a future discounting machine; meaning earnings matter for a stock, but more so in the future than in the past.

Most market participants take recent earnings and just extrapolate them into the future. They fail to really look at the mechanism that drives the bottom line for a particular company or sector. The key to being a good trader is to identify the factor(s) that will drive earnings going forward, not what drove them in the past.  

 Focus on the future, not the past.


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