Why Do Stocks Rise on Bad News
Jan 06, 2009
The rise in the Dow in the midst of bad news makes no sense unless you understand the role of the so-called "Plunge Protection Team" established in 1988 by Executive Order under President Reagan. It was established in the wake of the October 1987 market collapse to make sure this never happens again.
For example, in today's news the AOL Financial section ran the headline: Fed Officials Expect Long Economic Rut. It is a report taken from the minutes of the Fed's recent meeting.
So did the Dow fall? No, it rose. The explanation? None, really, other than the markets "shrugged it off." A second AOL news report right under this ran the headline: Stocks Finish Moderately Higher on Fed Minutes. One would almost think that the Fed's minutes showed GOOD NEWS.
A third article was about Alcoa laying off 13,500 people. Certainly, the Dow did not rise on that news. So why did the market rise when it should have plunged? And why does this sort of thing happen so much? Why are the markets not down below 8,000? I have no doubt that it is due to the Plunge Protection Team that is pouring money into the stock market in order to prop them up artificially.
Note the article below, written May 12, 2004. This was three years before the mortgage crisis emerged in the summer of 2007. The article not only gives the Executive Order establishing the PPT, but also warns of the financial bubble that was soon to break.
When financial markets are manipulated by government action, stock traders only have to know what the government is going to do in order to have a successful trading strategy. It has less and less to do with the fundamentals of the economy or what you know about finance. It is becoming more and more of a political game that is being played with our money.
This game cannot last forever, simply because it is artificial by nature. It is an economic drug, which treats symptoms but does not cure the underlying disease. But we will always suffer from side effects.