Tuesday, August 10, 2010

Difference btw commodities and other asset classes in selling the (good) news

So I reflected a bit more on the idea of "selling the news" in light of the limit up then limit down move in wheat. I hypothesize that selling the news is more often more effective in commodities than other asset classes in which all participants are speculators. This is because for commodities, there are hedgers whose primary concern is hedging inventory at prices better than what they were last at (in general suffering from bad trading psychology), regardless of news that may impact demand/supply further down the road. So if news is released that changes the demand/supply forecast down the road, speculators may react but be met w/ resistance from hedgers who don't yet care. When the juice runs out on the speculator-induced move, they are fighting each other for the best prices on the reversal. This phenomena isn't as present in other asset classes such as equities, where news is supposed to be quickly incorporated into everyone's forecast of the future, about which all market participants are concerned, thus limiting the resistance.

Just a thought.