WHEN THE MARKETS MAKE NO SENSE
by George Kleinman
Editor, Commodities Trends
July 24, 2006

Last week the Israel-Hezbollah conflict intensified, and as of this writing, it hasn�t cooled off yet. Traditionally, during unsettled times, gold will surge on flight-to-safety buying. And history also shows that if the Middle East heats up, so, too, will crude oil prices.

However, last week both gold and oil tanked, closing Friday near lows for the week.

Gold Futures



Source: Commodity.com

Crude Oil Futures



Source: Commodity.com

So what gives?

Watch The Reaction To �The News�

This is important. It�s not the news, but how the market reacts to the news that�s important. Certainly it's the news that sets the public perception, but you must be alert for divergences between the news and market action. It all has to do with expectation versus reality. Look for the divergence between what�s happening and what people think is supposed to happen. When the big turn comes, the general public will always be looking the wrong way. There are certain ways to analyze reactions to news (or even a lack of news).

Consider the following:

• If bad news is announced, and the market starts to sell off in large volume, it�s a good bet the market�s going lower.

• If the market doesn�t react much to good news, it�s probably been discounted.

• Moves of importance invariably tend to begin before there is any news to justify the initial price move. Once the move is underway, the emerging fundamentals will slowly come to light. A big rally (decline) on no news is almost always very bullish (bearish).

• It�s generally not good practice to buy after a lot of very bullish news, or sell after an extremely bearish report since both good and bad news is many times already discounted in price. Of course, you should always consider whether the trend is down or up when the news is made known. A well-established trend will generally continue regardless of the news. I remember getting caught in the emotion of a very bullish corn report in January of �94. Looking back, this news was the very top. An opposite (very bearish) report the following year turned out to make a significant bottom which turned out to be the springboard for the biggest corn bull market in history. The move wasn�t over until corn prices doubled a year later.
  
  Consider this breaking news from March 18, 2003, as reported by the Associated Press: �Iraq's leadership on Tuesday rejected the US ultimatum that Saddam Hussein and his sons leave Iraq or face war and the United Nations pulled its weapons inspection staff out of the country as battle appeared inevitable.�
  
  On that very day as it turned out, world oil prices collapsed by 10 percent (before the war had even started) since the market had already discounted the worst outcome.

• When unexpected news occurs (news which the market hasn�t had time to prepare for) and the market opens in a wide range or gaps lower or higher, sell out your longs, or cover your shorts and wait. Watch the market for 30 minutes to an hour. If the market opened sharply lower with heavy selling, and wasn�t able to trade much lower than that, it�s into support and can be bought at the market with a tight risk point. Watch the market closely at this point. Note the tone of the rally. If it�s small and the market is able to again fall under the levels made when the bad news came out (or above the good) it�s safe to assume the market is going lower (higher).

I remember the big bull coffee move of 1994. There was a day when the market was trading in the mid-80 cents level. I was long. Unexpected news hit the wires, something about the release of massive Brazilian stockpiles of coffee. These stocks were supposed to be held in reserve and off the market, but Brazil needed foreign exchange and changed their policy. The market gapped open lower and proceeded to trade down 400 points, stopping me out in the process.

It remained weak for a day or so, but mark my words: As soon as the market was able to cross above the mid-80 cent level again, the price registered before the unexpected bad news hit and it basically went straight up. This was the time to reenter. It was about $1.40 before the first freeze hit. The move wasn�t over until coffee prices hit close to $2.75, and it all started when the market--on no news--crossed the level made prior to the bad news.

George Kleinman is editor of Commodities Trends.

© 2006 George Kleinman
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