A few weeks ago, I ran across the following headline from Reuters: "Oil falls on stronger dollar, profit-taking."

It's one of my favorite Wall Street phrases: "profit-taking." But was the decline in oil prices really the result of traders closing out winning positions? A peek at the Chicago Board Options Exchange Oil Index (OIX) reveals that it had opened at 614.47 on the Monday (June 8) and reached a high of just 640.70 before fading that Friday to finish at 624.49. Given that the OIX got as high as 641.24 the previous week, I am left scratching my head. Where's the profit? (Find out what moves oil prices in What Determines Oil Prices?)

Opinion as News
And it's not just in the area of "profit-taking" that financial news headlines and stories appear to have fallen down a rabbit's hole. Everyday, it seems, I read fresh "news" stories that try to tell me why the market is acting the way it is. Check out these recent doozies:

"Commodity prices give up some of this week's gains"
"Commodities broke their winning streak Friday and retreated, as investors worried that prices might have shot up too fast." Madlen Read, AP

"Shares flat ahead of G8 as data digested"
"World stocks were flat on Friday ahead of a G8 meeting as investors paused for breath to discern further signs of economic recovery … Better-than-expected Chinese factory output in May and an upward revision for Japan's industrial output in April added to a deepening conviction that the global downturn has seen its worst … " – Sebastian Tong, Reuters

In the case of commodity prices, where is the proof that investors are "worried that prices might have shot up too fast?" Locked away in Al Capone's vaults somewhere? And exactly who has this "deepening conviction that the global downturn has seen its worst"?

Facts, Anyone?
Look, I'm not trying to make light of these stories - well, OK, I am - but passing off theories and opinions as facts is exactly the kind of thing that can get investors into real trouble. Remember the new economy, that Utopian vision of perpetual growth and prosperity, unencumbered by the pessimistic shackles of reality? As Dr. Phil might say, "how's that working for ya" these days?

It seems to me that investors would be wise to remember that the vast majority of those who write financial news stories and headlines aren't paid to be analysts and, thus, any conclusions they draw should be taken with a grain of salt.

Are investors really concerned that commodity prices have risen too fast in recent days? Perhaps, perhaps not. Did good news from China and Japan actually lead to optimism that the worldwide recession is, at last, coming to an end? Maybe, maybe not. The point is that nobody really knows; if they did, they wouldn't be writing stories for the AP or Reuters, they'd be sunning themselves somewhere in the Caribbean.

The Truth and Nothing But the Truth
Need proof that these assumptive headlines and stories are often mere conjecture? Consider this: On June 2, a Reuters headline proclaimed that "U.S. auto sales drop, but rays of stability seen." Since that time, Ford (NYSE:F), Toyota (NYSE:TM) and Honda Motor Company (NYSE:HMC) have all declined by 2.65% or more. If that represents "rays of stability," I'd hate to see what clouds of doom look like.

Another Reuters report on June 2 quoted an analyst who cautioned that "shares of Research In Motion (Nasdaq:RIMM) will likely come under pressure in the next few weeks as two rivals launch new handsets to compete with its BlackBerry smartphone." After a slight downturn the following day, shares of RIMM shot up 6.16% to close at $85.44 a share on June 11. Once again, the headline got it completely wrong.

So, the next time you read about a certain factor or economic indicator igniting to a market boom or bust, consider the source - or, better yet, do your own research. Hey, if your investment tanks, you can always blame it on "profit taking". (Sometimes, positive anouncements can mean bad news for a stock. Find out why, read Can Good News Be A Signal To Sell?)


Nothing contained in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Related Articles
  1. Investing Basics

    Inside IPO Roadshows

    Understand more about IPO road shows. Learn the reasons why an IPO road show is important for the success of a company's public offering.
  2. Term

    How Market Segments Work

    A market segment is a group of people who share similar qualities.
  3. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  4. Professionals

    Buy-Side vs Sell-Side Analysts

    Both sell-side and buy-side analysts on Wall Street spend much of their day researching companies in a relentless effort to pick the winners.
  5. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  6. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  7. Economics

    The Basics Of Business Forecasting

    Whether business forecasts pertain to finances, growth, or raw materials, it’s important to remember that a forecast is little more than an informed guess.
  8. Economics

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
  9. Investing Basics

    Financial Markets: Capital vs. Money Markets

    Financial instruments with high liquidity and short maturities trade in money markets. Long-term assets trade in the capital markets.
  10. Economics

    Understanding the American Dream

    The American dream is the belief that anyone, regardless of where they’re born or into what class, can attain their own version of success.
RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  3. Do plane tickets get cheaper closer to the date of departure?

    The price of flights usually increases one month prior to the date of departure. Flights are usually cheapest between three ... Read Full Answer >>
  4. What is the expense ratio in the insurance industry?

    The expense ratio in the insurance industry is a measure of profitability calculated by dividing the expenses associated ... Read Full Answer >>
  5. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  6. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
Trading Center