Market commentaries are easy to find. Websites like SeekingAlpha, Marketwatch, Investopedia, Forbes, and dozens of smaller ones provide a constant stream of what the financial industry calls “chatter”—verbiage about the market that is as valuable as the name would imply.
But sometimes listening to chatter has some real value. If you saw the movie The Big Short, you will probably remember the scene where Steve Carrell goes to Las Vegas to talk with people there about their real estate investments. He heard a lot of people brag about the market and talk about how it kept climbing higher and higher. This was a great piece of information that helped the real Mark Baum (Carrell’s character) make a winning bet against the MBS market.
Similarly, a lot of serious investors look at the “magazine cover indicator” as a way to understand investor sentiment in a big market and decide whether a bubble is ready to pop or there is still room for a bull to run. Like Baum, these investors use the chatter in the market to understand market sentiment—and then use that information to make an investment.
This is just one way in which the chatter is useful. However, there are market commentaries that are used much more seriously for the actual insight and knowledge they provide. Many market commentaries are read and digested in professional forums, including hedge funds and investment banks, where the hypotheses of these commentaries are synthesized and incorporated into an investment decision.
Also, these commentaries are not considered “chatter” by the people who read them.
So how can you distinguish what is good and what is bad market commentary? There are a few formulaic signs to look out for:
1. Charts and graphs
The best market commentary includes at least some data points represented in charts, graphs, and tables. This doesn’t mean “more” is better, however; some of the worst market commentary tries to look good by inundating the reader with multiple data points and charts that give the appearance of being data driven without actually being data driven. No charts is rarely a good thing (but it can be); many charts is also rarely a good thing.
So how many should there be? It depends. An article on the future of the U.S. Treasury yield curve would probably be much more data heavy than a comment on upcoming earnings for a recently IPO’d tech stock. Why? Because there is much more relevant data and math involved in predicting the Treasury yield curve.
2. Data sets and the use of data
This brings us to our second point; the data sets used must be relevant. Of course, this is often a point of contention, with some arguing that some data sets are more tangential than others. For instance, are weather patterns in Pennsylvania indicative of future natural gas prices? Possibly—but how relevant can one state be for a globally consumed commodity? For that matter, is there evidence that global weather patterns are indicative of changes to natural gas prices—and if so, how influential are weather patterns?
These are the kinds of questions many people do not ask about data when they see it. The basic assumption is that more data is always better—but that isn’t really the case. There are many instances of investors making bad decisions because they had too much data and couldn’t distinguish between what was relevant and what was superfluous.
3. The writer’s credentials and historical performance
Anyone writing a market commentary needs to make that decision—choosing what is relevant and what is not. The worst writers simply won’t care—especially if they are paid simply to write something (like on a website or in a magazine). The best will and they know they will be judged by their use of data by the most desirable readers.
In many cases, credentials are a quick way to determine whether a person is worth listening to, but one can quickly be surprised at how many bad market commentaries come out of CFA charterholders, for example. Historical performance can also be another way to determine the writer’s skill in choosing data and finding insights—but not in the way you think. Just because someone has “beaten the market” or gotten X return over Y period does not mean their insights are valuable to you. But a history of writing good commentary is often an indicator that they will write good commentary in the future.