The Market’s Breaking Point by JL Yastine

You may not realize it, but the gold bullion you own, as well as your stocks and mutual funds (presuming you have any), is being used, without your knowledge, in a grand voyage.

A voyage of price discovery.

Never heard the term?

Remember it, because price discovery is a great description for market movements that defy easy identification — like the one we’re going through right now.

I remember the first time I heard the term. It was in my reporting days; I was at a conference of traders, and a senior-trader-type (they’re the ones who wear ties instead of Hawaiian shirts at events like these) said something about “price discovery” in the midst of a panel discussion about soybeans.

The Market's Breaking Point
Photo by Terrapin Flyer
The Market’s Breaking Point

Dumb Money, Smart Money

Later I asked him: “What the hell does ‘price discovery’ mean, anyway?”

“It’s the ‘give-up’ point on the charts,” he said. “Weak hands, strong hands, dumb money, smart money. Get it?”

He could tell from my expression I had no idea. (Guess that means I was the “dumb money.”)

“OK, think of it this way,” he said. “When a test pilot takes a new prototype plane up in the sky for the first time, engineers may look at their calculations for wing surface and atmospheric air density, and state that the jet can safely fly up to, say, an altitude of 60,000 feet.”

“But they don’t know exactly,” he said. “It could be 61,000 feet or 65,000 feet. That’s the test pilot’s job — to find out where the air is too thin to support the weight and wing surface of the aircraft.”

A light bulb went on. Price discovery, I realized, is that point where buyers and sellers test the limits of the marketplace.

Price Discovery: The Invisible Line

Where’s that invisible line in the blue sky of bullish expectations — for the S&P 500, shares of XYZ WidgetCo, gold bullion, you name it — and at what point does the air become too thin to support those feverish buyers?

Traders do this kind of activity all the time. If the trend is pointing higher, they’ll keep bidding it higher still in the absence of any really negative news — until they find that invisible line that brings in lots of sellers.

It works in reverse too. How desperate is someone to get rid of a disappointing investment? At what point do those shares have unrecognized value, instead of being a dog growth stock past its prime?

Price discovery is your answer.

And if you’ve ever looked to buy a piece of property, and tossed out an unsolicited, rock-bottom “they’ll never go for it” purchase offer … well, guess what? You’ve just engaged in your own version of price discovery.

So what’s my point? We’re at one of those important junctures where nearly everyone is groping for a reason why the market keeps trudging higher.

As I suggested a month ago at the start of this “melt-up,” it’s important to pay close attention to what our team of editors suggest, in accordance with your own personal financial goals and outlook. Don’t rack your brain looking for a dark conspiracy. It’s all about price discovery, as millions of big and small investors grope for that invisible line on the charts that determines where the buyers run out and the thin air begins.

Kind regards,

JL Yastine

Editorial Director