UPDATE: The DOW opened down supposedly due to a bad jobs report[Link] - worse than expected by economists. I heard about this "worse than expected report" yesterday when Goldman Sachs (yes, these guys again) issued a report saying that this report will be worse than expected. You would think that traders have anticipated a worse than expected jobs report given the frequent reporting on Bloomberg & CNBC and newspapers that this economic recovery is going to be slow. I'm surprised CNBC reported that investors are surprised and disappointed with the jobs report. I really think the selling has nothing to do with the jobs report...traders for various reasons (high valuations, weak earnings, etc) think this market should go down executed their short trades after the jobs report - they have been shorting the market the whole week. I wonder if this will about some kind short term bottom for this market since all the sellers have been drawn out to sell....and they sold on a piece of news that wasn't news at all.
I woke up this morning to read the news online and found this Bloomberg report:
U.S. Markets Wrap: Stocks Tumble as Treasuries, Dollar Rally
According to the report, the DOW Jones index fell by 200 points as a number of US economic numbers came it weaker than expected. Investors fear that the stock market has run up too much relative to the strength of the recovery. Earlier in week there was also this report:
European stocks rise on upbeat IMF report
There was also this report that came out sometime yesterday:
I.M.F. Upgrades Forecast for World Economies
I've been watching all this news flow closely over the past 3 months. The economic picture is largely mixed as the global economic recovery is weak. So we get a few numbers that are better than expected and numbers worse than expected. I have a long memory. I remember a few months ago a series poorer than expect economic numbers came out and the DOW kept going up after an initial negative knee jerk reaction. The reactions to these numbers are hardly predictable.
There was also this report yesterday in USA Today:
Skittish stock investors sit out while bull market runs
This report says that the bull market will keep going because there are too many skeptics and hence plenty of money by the side. According to this sort of "rally denial" is what will keep the bull going.
There is plenty of guessing on whether this market will go up further and I don't want to add to it. There are always reasons invented to explain why markets to go up or down. If the market go up, pundits can always explain it by saying "there is a lot of money by the side". If it goes down, "the market as run ahead of the fundamentals" and so on. I can't tell if the market has already topped out or will resume its climb up - it looks like it has run up a lot so it would be a good idea to be cautious.
In the short term many of the sharp market moves has nothing to do with the economy or disappointment with the economy. There are many computer programs running algorithms that trade the market automatically base on relative movements of various markets. Recently investors have engaged in a particular type of trade known as a 'carry trade'. They borrow US dollars cheaply as the interest rate is low and use this money to invest in riskier assets such as emerging market equities. As long as the US$ is weak, it helps to keep money flowing to risky assets such as stocks. However, when something causes the US$ to go up, computer programs kick in to sell risky assets in anticipation of the carry trade unwinding. This programs work because unwinding of the carry trade causes persistence in selling - as they unwind and move back to US$, it causes the US$ to go up leading to more unwinding. Yesterday, supportive comments from Fed Chairman Bernanke, who said that there is no immediate risk to the dollar caused the US$ to strengthen and that could have triggered the large falls after the initial selling caused by the poorer than expected economic reports.