Market Reaction Time

With this post I would like to address the reaction time of the stock market.
Using a case study for a recent incident which was reported today, we can look into how stocks are effected by real world effects. We will look into General Mills Inc as an example.

First, the events which effect the stock prices in chronological order:

http://goo.gl/1GZceB - posted Oct 5 2015 - This is a large recall of products which General Mills assessed as having an allergy risk due to gluten-free labelled products containing wheat.
http://goo.gl/wLn6Aa - Posted Oct 5 2015 - This is a recall of Cascadian Farm Cut green beans which were found to have active bacteria found in them.
http://goo.gl/vDvRd0 - Posted Oct 7 2015 at 12:22pm EDT - This is a plant evacuation due to Carbon Dioxide leak in a plant. 


Now we can compare the news and the effects which result from them.

This is a good example of information inbalance in the stock market; the stock price appears to barely have any coorelation between stock price movements and news reports.
By the time that reports of the plant evacuation had came, the price had already hit the lowest point. There are several possible explanations for this, one being that there is insider trader, which is possible but unlikely. Another explanation could be that investors are able to overlook any setbacks that a company experience by reacting to the responses of the company rather than the events that they respond to. Inbalance of information is further complicated by the fact that the interpretation of information is as important as the information itself. A crisis for one investor might lead him to short a stock because of the loss of money while for another it may lead him to buy a stock because of the opportunity created for improved PR, customer relations development and overall greater exposure to consumers.

The most likely explanation is that we live in a complex world, filled with many systems of input and output which are effected by each other. This complexity, of our surrounding systems and events which result, is difficult to calculate without the use of very sophisticated technology and methods of measurement, calculation and prediction. It would be beneficial to remember that traders and investors are, in fact, people just like anyone else. They have a multitude of varying motives and outlooks on things and they are not always rational which creates even further difficulty when trying to develop a plan for stock market analysis. Sometimes, the best investment strategy would be to stick to the fundamentals since they are finite and measurable, to a certain degree. The uncertainty which arises from other market participants can also be measured and calculated using a method that changes with the circumstances and situations of the market. 


No comments:

Post a Comment