Friday, October 10, 2014

Before you go jumping out the window...

At the end of the day, the stock market works like any other market: it's prey to the forces of supply and demand. Wednesday there was great demand for stocks, yet there wasn't sufficient supply at the previous day's prices to meet that demand. Therefore, prices had to be bid higher in order to stimulate an increase in the supply of shares for sale. In other words, buyers came to market and were met by sellers who had no interest in parting with their inventory at the previous day's price. The end-of-the-trading-session buyers had to pay prices that equated to an increase on the day of 275 Dow points.

Of course yesterday was an entirely different sort of day. There was very little demand for stocks, and---in that sellers showed up in droves---there was huge supply. When heavy supply meets light demand, prices must be bid lower if the sellers are serious about dumping their inventory. Hence the 335 point drop in the Dow.

Yesterday's action supported my hunch (as I reported to you Wednesday night) that Wednesday's action was more about short covering than it was about any revelation coming from the Fed meeting minutes.

Now, to attempt to explain the last three days:

Tuesday's action (274 points down) suggested that bad news---specifically Germany's weak industrial production numbers---was bad news. On Wednesday (275 points up), the market seemed to treat bad news ---specifically the Fed's concern over the potentially negative impact of other economies' weakness and a stronger dollar on the U.S. economy---as good news. As for yesterday (335 points down), it appeared that bad news---specifically the European Central Bank president's commentary regarding structural issues in the Euro Zone---was indeed bad news. Of course if you're in that camp that hopes to see a meaningfully deeper correction (it's lonely here in this camp), you'd reverse those conclusions. I.e., you'd have seen Tuesday's and Thursday's news as good news, and Wednesday's as bad.

As I suggested in yesterday morning's audio, I believe that if Mario Draghi (the ECB president) can get the green light from Germany and France to embark upon U.S.-style monetary stimulus, you'd see the European equity markets spike in a big way---even though the Euro Zone is already experiencing much of what QE is designed to accomplish: low interest rates and a weak currency. Therefore, the bullish effect I believe U.S.-style QE would have on European market sentiment would be largely emotional: That cozy feeling that no matter what happens, the ECB stands ready to print their troubles away. The question then would be, would that coziness turn into the confidence that would inspire Europe's players to take full advantage of the increased liquidity and ridiculously low interest rates? As for the Euro, the presumed stimulative effect of a weak currency comes from the cheapening, in foreign currency terms, of the home country's (countries' in the case of Europe) exports---with increasing sales resulting. Of course we're talking the opposite when we turn the tables: The stuff of U.S. exporters is more expensive to European buyers---which is what the Fed seems a little worried about.

As for what to expect going forward: don't know of course, but before you go jumping out the window, remember, there's a term for what we're experiencing, it's called the stock market. And, for whatever reason(s), October has historically been---more so than most---the month that slaps us back into reality.


1 comment:

  1. Your Comments

    OUCH, I know this is what we can be exposed to being in the stock market but it is hard to stomach..
    Last month had a big loss and next one seems to be even worse !
    At my age I start worrying about recovery time.
    After the last BIG one it seems like there was not a total recovery ?
    Anyway, just pondering....