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.


thejerry

Maybe these headlines were all just April Fool's jokes.

DJH

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.

Austin

Speaking of Taleb, he has a post on his blog about this as well.

On the day SocGen was (poorly) unwinding Kerviel's positions, there was a news story narrating the supposed reasons for the market decline which later turned out, of course, to be completely false.

I too support the more accurate headlines proposed. More so, I like the occasional reporting I catch on NPR, which is as follows:

"Today, the stock market Dow Jones index was down x%."

With no further commentary.

discordian

What I don't get about the stock market headlines is where the lines between plummet, dive, fall, drop, dip, droop, sag and slow are. One day a -.5% change is a dive but the next day a -1% change is only a droop.
why can't even one new source standardize on its own terminology?

Nicholas Weaver

Whats wrong with

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

Jrome

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.

Dan

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.

RobertSeattle

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?

Matt

Never discount the human factor. Maybe some trader did not get laid the night before so he is frustrated and starts selling or the reverse when he gets his sexual needs met and starts buying. I've heard this so many times on the trading floor that it is as good an explanation as the cycles of the moon and position of stars.

mark

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.

Mike

Today's column and Nick Taleb's books totally have it right. Just mindless after the fact rationalization.

Likewise, the media always show a image of a 'happy/excited' floor trader when the market has a big up day or a 'sad/frustrated' trader when the market has a big down day. As a former floor trader I remember some very happy days when the market made a steep drop and vice versa. However, as with the honest headline, you will never see a front page picture of the happy short trader after the DOW drops 300 points!

will eigo

Dubner ( and clearly others before in other fora ) nail it. Human nature of today?s variety seeks causality and closure , the media, especially in its dumbed down form, abets ablely.}

Neat point about how only venture capital is true investing. Actually define it as only capital providers that put money directly into company. Buying stock or bonds on an exchange is not investing since the user of the capital receives nothing. A bank or brokerage house is an investor when it lends or underwrites because it advances funds to the end user.

Everyone else is just deposting their money at the casino ( securities not chips ) moving their markers on the betting tables as the dice fly and balls bounce before landing still.

But if you know how to do valuations and can read the tea leaves of investor psychology and media then it is better than a game of chance ( buy and hold ).

mgroves

I think it's because optimism and good news are what sells papers...oh wait...

Jan Marfyak

Anyone who thinks the stock market is anything more than Las Vegas writ large is in fantasyland.

Insiders, floor tradewrs at the exchanges and large banking firms manipulate it and the average investor is just along for the ride. The explanation of the ups and downs are simply nonsense to paste over what really goes on.

I have been a successful investor for fifteen years and have done pretty well. But I don't do charting, listen to the nonsense printed on the finacial pages and pretty much go with my own good senses.

I'm a moderately good card player and never learned bridge conventions but still come out on the winning side.

Traders and dealers make money and the average Joe gets what is left over.

Snake oil salesmen have simply switched from bottled elixers to charts and formulae and you know who pays the piper in that deal.

middle

Denial. :(

AaronS

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.

Read more...

Jesse

Despite all the comments- the articles do serve as a reminder of what the sentiment was on that day - whether or not its predictive or useful is silly - its just news filler more or less - i would hope serious investors do not read these articles as indicators

Joel Jordan

Nobody seems to have mentioned the efficient market hypothesis. That is, every bit of news about the badness of the economy is expected, so investors have already factored it into their valuation of stocks. What distinguishes any particular piece of news as influential is that it's unexpected, so the market has to revalue things to incorporate that news.
It's the timing and tone of the news that's random. But for any given piece of news, the effects are quite predictable.

frankenduf

that's what you get for reading yahoo!news- the name alone is embarassing

Kent

Or it could have been because of an April Fool's joke gone bad.

http://bigpicture.typepad.com/comments/2008/04/internet-hoax-g.html