Friday, December 3, 2010

Why did the market rally this week?

This is the question everyone asks. Have you ever noticed that the financial media always has an answer?The market rallied because the Fed this and earnings that. An analyst upgraded stock X.

Here is something I used in a presentation I did on dealing with the media (if you are so inclined to be quoted by it).

"Stocks rallied on rising oil prices (economic demand)."
The next day -  "stocks fell on rising oil prices (inflation)"

The NY Times uses the phrase, "all the news that's fit to print."  I cannot remember who said this, and it could have been Mad Magazine, "all the news that fits, we print."

Get the point? Journalists get paid to fill a column so they have to say something.

I was asked by a colleague this week why stocks rallied. Was it a knee jerk reaction or is the economy really on the mend. Let's assume everyone believes the stock market looks forward - which I do. How can something that happens today effect something that moves on events that are expected to happen nine months into the future?  You get that point, too.

Here was my response:

"Stocks rallied because all the supply that supposedly came out this week thanks to economic (Ireland) and geopolitical (Korea) concerns was handily absorbed by demand in the market. It was also an affirmation that the liquidity pump (EU/IMF) would remain open (sentiment).

The market will reflect the real world one day - triggered by the liquidity pump shutting down. Until that happens, stocks are for traders or long-term investors willing to ride out another cyclical bear."

Let me close with another excerpt from my presentation: 

"U.S. stocks will rise next week as Wall Street bets that corporate bellwethers including Citigroup, International Business Machines and Google Inc. will post stronger-than-expected financial results, strategists said."

- uh, fellas, if they expect them to be better then they won't be better than expected.

8 comments:

patrick neid said...

The market knows it has to be north of 1,000,000 by 2100 so when in doubt it rallies!

monroe said...

Friday CBS reported that the Ben Bernanke interview took place on Nov. 30. The market rallied 250 on Dec. 1. Did something leak? Somehow I don't think the SEC will investigate this one.

Quick Takes Pro said...

I bet you it will not be north of 1,000,000 and will bet you one beer to be collected on 1/1/2101.

Quick Takes Pro said...

Monroe,
You are as cynical as I am :-)

patrick neid said...

The beer bet is on. Now I have to figure out how to be here to collect! On a serious note however I don't think 5.5% a year is that difficult historically speaking. That or our entire econ model--stocks, bonds etc won't exist.

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