The Stock Market Surged Yesterday Because … Why?

I may be wrong, but it strikes me that the articles that appear in nearly every newspaper every day that describe a particular day’s stock-market movements are pretty much worthless.

They try to pin a cause or two on the effect that’s just been observed, when in fact the effect may have little relationship with the narrow causes being credited. Consider, for instance, this A.P. headline and news brief that appeared on Yahoo! News at about 2:30 p.m. yesterday:

“Stocks Surge to Start Q2″

Wall Street began the second quarter with a big rally Tuesday as investors rushed back into stocks amid optimism that the worst of the credit crisis has passed and that the economy is faring better than expected.

How does the A.P. really know that investors “rushed back into stocks” because they were optimistic that “the worst of the credit crisis had passed” and that the economy is “faring better than expected”?

The A.P. folks sure didn’t learn this from reading their own business headlines. Here are five A.P. headlines that appeared directly beneath the stock-surge news brief.

  • “Celent: 200,000 US Banking Jobs at Risk”
  • “Manufacturing, Construction Weaken”
  • “Ford, Toyota U.S. Sales Down in March”
  • “Congress Has Big Questions for Big Oil”
  • “U.B.S. Will Write Down $19 Billion”

Here are a couple of stock-market headlines I’d love to read one day:

“Stocks Surge, Reasons Unknown; May Be Nothing More Than the Random Fluctuation of a Complex System”

or:

“Stocks Dive: Three First-Movers Sold Hard and Then Everyone Else Inexplicably Followed”

But I could probably live to 150 and never see that happen.

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  1. AaronS says:

    At the beginning of a quarter, many mutual funds make investment decisions. They may reposition money or increase their investements, which would have some impact.

    Of course, good news or outlook helps, too.

    Further, when stocks fall, newspapers talk about “stocks took a tumble today,” but oftentimes it is simply people TAKING PROFITS from the run up over the past several days, perhaps.

    And people to not “inexplicably follow” big sell-offs. Very simply, when big positions are sold, it causes the market to go down. And when the market goes down, there are people out there who, in order to protect their principal, will exit the stock at just a small downward move, too. That, of course, causes the stock to fall further, until finally even those with more tolerance for stock fluctuations decide to get out. This goes on until there are traders who think, “Wow! That stock is a bargain, I’m going to buy a load of it.” And, thus, the decline is halted and so forth.

    Oddly enough, in “Market Wizards,” one guy noted that whenever there were big write-ups in, say, Time, about how the gold market was going to the moon, or whatever, that that usually signaled the top–ha!

    All we have to do now is look for the Wall Street Journal to say something like, “how low will it go?” and we’ll know to pile back in in anticipation of the turn-around.

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  2. mgroves says:

    I think it’s because optimism and good news are what sells papers…oh wait…

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  3. mark says:

    This is pretty much the premise of Nicholas Taleb’s books on randomness and Black Swans.

    No one really knows why anything happens, they just rationalise it after the fact, the proof of this being peoples inability to predict it before it happens.

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  4. RobertSeattle says:

    The volatility in the stock market freaks me out. Why should the apparent value of a Multi Billion Dollar company go up or down multiple percent at the whim of Wall street?

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  5. Nicholas Weaver says:

    Whats wrong with

    “Stock Market went up/down by >3% today. Volatility happens”

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  6. DJH says:

    The stock, commodity and options markets are really just massive experiments in mob psychology. Some things happen in them which are based on routine activity (such as the timing factors cited in comment #1, AaronS), but often things happen which are based solely on emotional factors, e.g. when stocks rise or fall based on perceptions and not on any objectively-meaingful event.

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  7. Jrome says:

    Yesterday was April 1st: that may explain why GOOG increased by 5%.

    Google made many many pranks. The company seemed to be back, with its usual optimism and user-friendly products. Google released -only – a feature for Google Docs, but above all, announces Virgle (an April fool organized with R. Branson).

    In the same time, a crucial vice-president left for EMI, and no new figures balanced the consensus over the slowdown of the Internet industry.

    Perhaps, yesterday’s investors spent long time surfing the Web, and laughed a lot. This has probably affected their decision.

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  8. Dan says:

    Second the post about Nicolas Taleb’s work. There are far too many factors to attribute movement to just one. As NT suggests, watch some of the financial shows with the sound off. Its funny to see how ridiculous the hosts look when they are spouting off.

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