Why Are Stocks Going Up?

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I'm not exactly sure why network executives think they need to have bottle-blond former models or actresses with foreign accents reading teleprompters on the market channels these days. To be honest, I don't know of a single professional investor that tunes into a particular station to watch the "talent." And when the usually less-than market savvy anchor goes off the reservation and tries to provide meaningful insight, the result can be rather comical.

As the market was closing yesterday, the director of one of the prominent business channels cut to an anchor for what was billed as important insight (yes, they even "teased" the upcoming commentary). I assumed there was breaking news on IBM (IBM), American Express (AXP), or eBay (EBAY). But instead of analysis on the state of the earnings season, our anchor informed viewers in no uncertain terms that, "The market is rallying for the wrong reasons."

I bring this up for two reasons. First, I got a giggle out of a news anchor telling me that the market was just plain wrong. And second, when I got done snickering, IM'ing, and texting what I had just witnessed, I realized that a great many viewers might agree with with what she had just said. There seems to be a perception among individual investors that the market must act a certain way in order to make sense. So, with stocks going up for the second day in a row in the face of the Fed Chairman suggesting that things were going to stay crummy for a while - and maybe even crummy enough for the FOMC to take action again - I'm guessing that a fair amount of people might actually agree with this uber-blonde commentator.

To her credit, it is true that the TV personality in question was talking about the idea that the market was rallying on the hope for more QE from the Fed. But the problem is that she and her cohorts went on to discuss whether or not the Fed would, could, or even should embark on another round of bond buying. The crew yammered on about the idea that QE may not have a meaningful impact on the economy or the unemployment rate and generally surmised that the plan wasn't likely to work. Thus, logic dictated that the market should (always a key word in this game) not be rallying.

The point, however, is the market isn't rallying because traders think that more QE is going to fix the economy. Stocks are not being bought because another round of bond buying is the right thing to do or even because investors think that the Fed targeting asset prices is the best way to impact consumers' psyches. No, it's not about "the reason." It's not about the "right decision"... It's about "the trade."

IF (note the use of all capitals) the Fed decides to launch another round of QE, every trader on the planet (including yours truly) knows that its "risk-on, baby." If Ben Bernanke pulls the trigger and starts buying more bonds, stocks (SPY, DIA, MDY, QQQ, IWM) go up, emerging markets (EEM) go up, commodities (DBC) go up, junk bonds (JNK) go up, etc, etc. And given that Mr. Bernanke made it perfectly clear that his cavalry would ride if needed, traders don't want to miss out.

What I'm saying is that regardless of whether or not QE is expected to work, stocks will go up all the same. Why? Because this is how the game is played. Since the world revolves around algorithms these days, everything boils down to an if-then statement. And the bottom line is traders and their computers know what to do "if" QE is triggered.

So, the question of the day isn't really about the reason stocks are going up. It's really about whether or not QE is going to happen. And for the past two sessions, it's been about positioning accounts for the next risk-on trade.

Disclosure: Positions in stocks mentioned: SPY, EEM

Follow Mr. Moenning on Twitter: @StateDave (Twitter is the new ticker tape)



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , US Markets , Banking and Loans , Stocks

Referenced Stocks: AXP , EBAY , IBM

David Moenning


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