Understanding markets is a constant battle between what you think should happen and what you think will. Not only are they quite often not the same, they can switch places out from under you, and the more you lose sight of the distinction, the more likely you are to lose money.

As a result, in order to be "right" (whatever that means), it is not enough to analyze a company correctly. You must also be correct in your analysis of how the market may react to what you find.

For example, you may spot what you deem to be a sign of positive growth tucked away in a company's financial statements, and you may conclude that the stock is undervalued. The market may view the exact same information in a negative light and punish the stock price accordingly.

Thus, you can be right about the company's prospects, but if you are wrong about how (or when) the market will respond, it may do you no good.

I bring this up as third-quarter "earnings season" is upon us, as it provides ample opportunity to see this phenomenon in real time. This week, for example, brought results from two stalwarts of the Dow ($INDU), IBM (IBM) and Intel (INTC).

Make the market shrug

IBM actually lost at beat-the-number Tuesday night, and its stock was hit for about 5% on Wednesday. Big Blue has a fairly long track record of announcing corporate earnings that don't quite "smell" right, yet the stock price is rarely affected. So even if you got the financial analysis "right" and predicted the miss, you still could easily have gotten the market's reaction wrong.

Interestingly enough, this quarter was just as smelly as usual. But this time the market cared, seemingly because the company admitted that its businesses were worse at the end of the quarter (particularly in North America), which, of course, implies that they might be a little more worse in at least part of the fourth quarter. That is about the only explanation I could come up with, because all of the squishy comparables and light revenues, while beating the number and talking about fat gross margins, were literally business as usual.

Intel also released earnings on Tuesday, and did a little better this quarter (than it had preannounced it would). But it would appear that business is going to be under pressure next quarter, as the inventory build that took place in the third quarter comes home to roost. Thus, Intel, was about 2% weaker on Wednesday.

I had hoped to get a better read on the market's mood with how Intel was treated, but the situation is just a little too murky to draw any conclusions.

Obviously, the early trading Wednesday showed that, while IBM's and Intel's stock prices declined, the market overall could not have cared less that IBM and Intel were lower, although a few hardware makers of various stripes were under a little pressure. (These are other tricky things to predict: when "company specific" results will affect related or similar companies, and when they will boost or dampen the market's animal spirits generically.)

But the Dow was essentially flat on Wednesday while its two big tech leaders were in the red, so it didn't look to me like there was a whole lot of consternation.

Latest euro-panic is over

One area where I did see a tiny bit of light being shed was in Europe, where Spain's debt market was on a tear to the upside early this week, with yields falling at one point to about 5.40%. That actually dragged Portuguese and Italian debt along as well.

The bonds of the PIIGS nations -- Portugal, Ireland, Italy, Greece and Spain -- generically have rallied substantially lately, while the other, somewhat stronger credits have declined, with the bond markets in Europe giving a strong indication that panicked trading driven by fear of some "deflationary accident" is at an end.

The proximate cause for all of that celebratory action appeared to be expectations that a "precautionary" bond-buying program to aid Spain would come out of the European Union summit, as had been rumored. The summit ended Friday without such a deal, though hope seems to remain that the European Central Bank will still find a way to implement a similar operation.

Obviously, people can change their minds, and fear can take over again, which could occur before CB President Mario Draghi actually does become Ben Bernanke. But for now, it looks as though expectations are that Mario's money printing is going to win the battle.

Double trouble?

Lastly, this week saw an interesting wrinkle in the currency and bond markets. On Wednesday, the dollar was weaker and is now back to the anemic (i.e., before-"deflation accident" fear trade) levels of last spring, and the bond market was also weaker. In particular, the U.S. 10-year bond traded to a yield of about 1.78%.

What you now see in the Treasury market is a small pattern of higher highs and lower lows (looking at yields from an inverted standpoint), potentially indicating that the path of least resistance for yields is up (and therefore down for bond prices).

I don't want to make too much of this, because these are very early days, but the outcome I had recently feared, of the 10-year trading below 1.60% (and breaking the pattern I just described), did not occur, and we have seen a modestly higher high. If the 10-year managed to trade over 1.87%, the case will become even stronger. If we get into a period with both a lower dollar and Treasury market, that would potentially be a very early indication of a funding crisis.

Taking a step back, I discussed in August, Draghi's idea to concoct what is now called the outright monetary transactions plan could mean the deflationary fear trade might be ending for good. If that is the case, one of the things that ought to occur is less demand for dollars and Treasurys, and the ramifications are going to be quite large, not the least of which will be even more downward pressure on Treasurys, and the dollar as well.

If we get into a period of rising rates and a declining dollar, indicating that the Fed has lost control, that won't be bullish for equities either. But we must not get too far ahead of ourselves. Thus, I don't want to make too much out of squiggles that you basically need a magnifying glass to see, yet I do want to be alert to a trend change and the problems that could result.

King World News

In my latest interview with Eric King we discussed the situation in Europe, the paralysis of politicians, and some of the inner workings of the metals market. Interested readers can listen to it here.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.