Attributing Motives To Stock Market Fluctuations

Throughout this whole financial crisis, I’ve been hearing news stories about how “jitters” about this or that caused a sell-off on Wall Street. Or, I’ve read how certain steps taken by the Feds have created confidence in investors, which has caused a fluctuation in the stock market.

How do these motives get identified? How are reporters or analysts able to summarize the presumably anonymous investing activities of millions of investors?

As far as I can tell and have read in numerous sources, on any normal day, they are guessing. Current days may be abnormal enough to be a different beast.


Reporters just look at the emergent behavior and report that as if it were on the individual level. In reality it is a multitude of factors that could even contradict each other, but together produce the single result of the current condition.

Or, more simply, reporters talk to a number of analysts and report the consensus of what they say.

That begs the questions, how does any individual analyst the reason why millions of individual transactions were made?

It’s their job. That’s what they’re paid to do. They have experience in what triggers cause what responses.

It’s not usually a terribly mysterious process. Most of the trading is done by a relatively few enormous investors. Everybody knows everybody else, everybody talks to everybody else. They use computer models that are very similar to one another’s. Certain reports, of statistical indicators, of values, of quarterly earnings, of federal actions, occur at known times and whether they are up or down will govern actions in the same direction virtually every time.

It’s like asking lawyers how a Supreme Court decision will affect the outcome of future cases. Most will give similar answers because that’s been the pattern in the past. And they know the patterns of the past because they spend their whole professional lives analyzing them.

It’s not a case in which everybody counts equally. Those millions of investors mostly don’t exist - they’re invested in 401Ks and pension plans and mutual funds in which a few people do the investing for them. The small investors who try to do it for themselves can be discounted because they’re a fraction of a percent of the whole. Getting a read on what those few who count do is not rocket science.

Whether what they do is correct or not is a different and far more difficult thing to figure out without hindsight. But figuring out why the herd breaks right or left is something any cowboy can discover.

I’m also of the opinion it’s a momentum effect. That is, a big player like Fidelity, sells shares in companies X, Y, and Z. Other investors may see this and do the same causing even MORE investors to follow them because no one wants to lose out and sell at the bottom. At some point, however, you are either selling at a loss, or it makes sense to invest in it because it is now cheap and turns a profit.

Personally, with all the automation out there and computers set to trigger orders of X quantity of company Y shares when it hits Z price, I’m surprised the market doesn’t reach a very rapid equilibrium within a few minutes of a major change.

I think we did sort of see that in last week when the market took a nosedrive and then had nearly recovered 24 hours later. Personnally, my liklihood of investing increases the further the market falls, because I know it will always recover. Mortgage crisis, high gas prices, war in fill-in-the-blank country? This too shall pass…

For instance, this from the New York Times

The market never likes uncertainty. It’s the biggest bailout in history. It’s full of uncertainty. The market went down.

Can there possibly be any doubt in any mind remotely aware of the stock market that cause and effect is going on? What’s the question here?

What you describe is not a recipe for equilibrium; rather the opposite.

Nassim Nicholas Taleb writes contemptuously of the finance journalists who purport to explain day-to-day movement in stocks or commodities. It is, of course, their job. But it’s always worth asking the question, when an explanation is offered after the fact, whether an equally plausible explanation would have been equally confidently presented for a movement in the other direction.

Look at the recent United fiasco. Look at triple witching hour. With the amount of automated trading going on, how much of a market move based on motivations and how much is the simple amplification of small moves by a lot of people using the same basic algorithms?

But except in rare cases where the software is the story, it is not surprising that reporters make the market moves more accessible by assigning human motivations to the market.

My personal opinion (with absolutely no evidence to back it up):

If you’re a stock broker, or a stock analyst, or indeed anyone whose job depends on having some stock market expertise, then you absolutely, positively, can never respond to the question “why did the market go up/down/sideways today?” with “I have no idea, but it might have been…”.

You absolutely, positively have to be able to respond to that question with a specific reason (or reasons) and with the utmost confidence - so you do so.

And then everyone in the reporting business reports what you said with equal confidence.

It’s just the way the world goes around.

Yes, there can be doubt. Case in point, those “explaining” oil prices just use the same set of facts to support contradictory results.

My opinion: All of it is hooey. Anyone who claims to know why “the market” did one thing or another is deluding themselves. Over the short term, the market is moved by mob mentality and psychology, not rationality. And these short term fluctuations are meaningless. IMHO, over the short term, the market is completely insane. Movements from day to day and week to week have no rational basis. It’s pretty easy to ascribe big drops to bad news. But what about the occurrences where they say “The market shook off the bad news about X and gained N points…”.

I don’t listen to most of this short term pontificating.

On the other hand, the stock market approaches rationality in the long term (years, decades). Over the long term, stock prices reflect earnings. If a company grows earnings at 10% - 15% per year, in 5 years the stock is going to be worth a lot more than it is today.


I’ve always thought it was a bunch of malarkey and it really makes me wonder about the intellectual probity of financial reporting in general.

“The Dow industrials closed down 372 points on growing uncertainties over the rapid approval of the biggest government bailout in history.”

Oh really, genius? Anyone could have seen there would be uncertainties. If you knew uncertainties would lead to a drop in the Dow, you could have made a killing and been retired to the Bahamas by now.

I put it in the same class as those flowery wine descriptions: “Hints of toasted chestnut and wild black cherry, with an undercurrent of sweaty socks”. Talking without really saying anything.

Today was classic. The Dow was down until about 3 pm and the headlines read, “Stocks fall on bailout doubts”. Then between 3 and 4 pm they shot up, and the headline immediately changed to “Stocks pop on bailout bets”.