Inflection Point Defined in Stock Market Context
Inflection points are by definition points of directional change, or according to my dictionary the point where a curve changes direction. I believe the topic is best studied non-specific to second, hour, day or week. It's too difficult to be that precise in the pegging of its arrival. However, like any point of measurement on a timeline, we reach it in apparent linear or non-linear fashion, depending on the time period used as the basis for measurement. For instance, if we study monthly data, the trend should look more linear than if we look at it on a per minute basis.
Good News Bad News
At inflection, the market is barraged by mixed messages on a daily basis. At this particular inflection point, which would be one reflective of economic trough (hopefully we're there), the messages are completely different than those at economic peak. The federal government, including the Federal Reserve Bank, the Treasury Department and Congress, has taken substantial action to spur economic expansion. That's the good news, offering reason for stock price appreciation, and hope.
At the same time, the real economic data trend is one representative of deterioration. The news flow is getting worse, not improving. Even so, we've yet to record a quarter of economic contraction. If you play stocks by the economic book, you would still be months away from taking long positions.
However, Mr. Market does not play by the economic book. He's much more complex than that. He's what's called "efficient" in university lecture halls the world over. He absorbs all available information and prices it. He weighs reported facts at face value and their future implications employing probabilities. In other words, he considers Wednesday's reported durable goods orders at face value. At the same time, he knows the Fed's actions should help spur economic growth, and he weighs the probability of how much benefit will come versus harm (inflation) and when it is most likely to arrive. This helps him estimate where durable goods orders, and other economic measures, will rate months from now. Both these data points, present and future, play a role in the market's pricing of securities. Of course, non-economic related industry and company specifics play an important role for each individual security as well.
The point is that while economic data flow and news seem dire now at the point of inflection, and short-term trading reacts to it, the market is at the same time weighing how government and private sector actions might drive future economic conditions. This stew of data is simultaneously pricing securities, and should start to lead the stock market higher well before economic conditions are reported improved. So, don't get lost in the mayhem of the minute. Be aware that you will fight a wall of worry on your way to capital gains, and never more so than at the inflection point of economic trough.
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