Research The Consensus

Another insight into market positioning and the value of determining
the consensus view can be gained from the activity surrounding
economic data releases—but this time from the
activity in advance of the release. Surveys are readily available
from media services that quantify the expected responses to the
release of each specific data item. While the consensus number
is valuable in determining the net view of the overall market, it
is also worth looking a little deeper. If you examine the details,
these surveys usually show how many forecasters are bullish and
how many are bearish. They also show whether there is a wide
divergence in expectations or relative agreement among participants.

If the forecasts are grouped tightly together, it suggests
that the market has a high degree of confidence.
From a trading perspective, this means that an unexpected
outcome should have a major impact on the price of the
underlying currency or stock, or on the market as a whole. If a
significant majority of forecasts are bullish, for example, a bullish
outcome is likely to have less market impact than a bearish
result. It is the nature of the economic release relative to the
consensus expectation, combined with the price action after
the release, that provides the best available guide to overall
market positioning in a particular stock or currency. Once the
process of market positioning is understood, this knowledge

can be used by warrior traders to profit in similar situations in the future.

Concentration within Consensus
Knowing how to read and act based on the degree of concentration
within consensus is the mastering of this art. The consensus
forecast for any economic data release is just a number,
and this will be adopted as the overall market consensus. While
it looks the same for every release, there are secrets within.
There are often quite significant differences (and distinctions)
in the detail behind various consensus forecasts. I call this
the degree of concentration within the consensus. Regardless of
whether there is a wide range of forecasts that are evenly distributed
or a narrow concentration of forecasts from all contributors,
an overall final average and consensus will be
distilled by the market. Unless the detail of the survey that led
to the final consensus number is looked at, traders have no way
of knowing whether the market is diverse in expectation or
highly concentrated. This is important in understanding the
potential price reaction to the data when they are released.

When the actual result diverges from the consensus expectation,
market price reaction will be dramatically different
depending on whether the consensus expectation was backed
by a concentrated narrow range of forecasts or by a widely dispersed one.

If the market is positioned over a wide range, unless the
result is completely outside the entire range (which does happen),
the whole market is not required to move toward what is
an unexpected reality. If, however, the entire market was narrowly
focused on a particular outcome and the actual result was
different even to a relatively small degree, the entire market has
to adjust to the unexpected reality. Obviously, the power of the

movement will be significantly greater when the consensus is
concentrated.
Read More: Research The Consensus

Consensus , The Level Of Belief And The reality

While most of the market may be bullish in view and forecasts, it
can be the case that few actually have positions set in support of
this view. In such circumstances, the market maintains the ability to move quickly
to the upside because, despite the bullish forecasts, the market is still short. This
can happen, for example, when the expectations for a stock are quite positive
but the stock will soon go ex dividend.

This approaching event can be enough for potential buyers to hold off, waiting
to buy at a lower level after the dividend. That may sound contradictory,
but market price movements around dividends are not always
what the textbooks suggest.

Another example might arise if everyone is forecasting a currency
to be strong because of its trade balance and the amount
of investment flowing in but is concerned the country’s central
bank may intervene to prevent the appreciation of the currency.

Again, the market might be offering bullish forecasts, but
few, if any, participants are actually long. In the end, this is the
potential buying power that may well see the central bank overwhelmed.
Hence, the market can move sharply higher despite
consensus being bullish if this consensus has not been acted on.

Consensus expectations are the bread and butter of warrior
traders; however, what really distinguishes warrior traders in
this area is their ability to discern the quality of the consensus
view in terms of concentration and belief.


CONSENSUS VERSUS FUNDAMENTAL REALITY
Hence, getting markets right is about finding the difference
between the current (and likely future) fundamental economic
situation and the broad market perception—that is, the
consensus—of what that reality may be. Is there a variance
between the reality and the perception of a particular market?
If so, at some point the market will have to play catch-up, and
that period of adjustment is likely to provide enormous profit
opportunity for the speculator aware of this early in the game.

Sometimes the reality and the consensus perception of a particular
fundamental backdrop are aligned. More often than not,
however, they are either at odds or at least in some kind of divergence.
It is then only a matter of time before they are forced to
converge, and in most circumstances, due to the energy of the
catch-up phase, the market is prone to dramatically overshooting
the mark. This is the basis of all large and sharp adjustments
seen in markets.

The interesting thing is that when the consensus is the same
as the fundamental reality, there is generally not a lot of money
to be made—the reality has already been accurately priced into
the market. It is when the consensus differs from reality that significant
opportunity presents itself. However, how is it that,
given the high degree of communication in modern society and
the advanced analysis of economies and markets, the consensus
is frequently, let’s face it, wrong? Understanding why the consensus
frequently fails frees warrior traders from its often powerful
influence, allowing a more pure and objective focus on
major opportunities as they are presented as a result of this very
failing.
Read More: Consensus , The Level Of Belief And The reality