Stock Market Surges on Bad News!

This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.

Many people may be a tad mystified about yesterday’s US stockmarket movements. Markets opened with a predictable fall in response to the dreadful labor market data, falling some 3 per cent (with the S&P dropping near the 800 level yet again), but reversed course around midday. By 2 pm they’d crossed into positive territory, and then shot up dramatically within minutes, with the Dow leading the way (up about 3 percent by 2.30). Gains were consolidated after that, and the S&P closed up 3.7 per cent at 876. So, markets moved around 6 per cent yesterday, which would have been a major story only a few months back, but scarcely catches the eye today. Still, the rally was unique because, unlike other, similar late rallies on days dominated by bad news, it wasn’t short-sellers forced to buy stocks they’d borrowed to short, but which actually gained in value, or bottom fishers looking for bargains, who provided much of the demand. So what was it?

Today’s print version of the Financial Times provides some good and bad answers to these questions. According to the story (“Blue Chips Stage Dramatic Recovery in Late Trading”) the two o’clock surge was based on a UBS report that regulatory changes in the insurance industry could be announced at a state insurance regulator meeting this weekend. The changes would relax insurers’ capital requirements, and could, according to the note, come as soon as next Tuesday. Insurance stocks rocketed at the news, with Hartford Financial Services gaining 102%–that’s three figures, not a typo.

Trading on all indices was light for the day, so gains like this were enough to explain the positive gains for the day. But what moved stocks out of deeply negative territory to begin with? Here the FT is of less help. It says the fact that the S&P didn’t break the psychologically significant 800 floor itself provided a reason to buy. It quoted Randy Frederick of Charles Schwab: “There’s a lot of things you can use to predict a bottom. One of them is when a market stops reacting to adversely to negative news.” That’s the best argument against the Efficient Markets Hypothesis–at least applied to stockmarkets–I’ve ever heard, anyway.

Other factors, such as oil dropping another 6.3% in a single day (and at below $40 a barrel right now, it can’t do this much more), have been bandied about as factors encouraging buying (presumably consumers will now start opening wallets rapidly filling up with pink slips and spending money saved on cheaper fuel). But it’s hard to believe that even the most jaded traders can see a real bottom here. The outlook for the corporate profits they are tentatively buying rights to is just too horrific right now. This is basically money that has nowhere else to go–except under the mattress, perhaps.

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