I’m out on my after-market walk yesterday, and I run into Richard and Kara, his terrific black lab, who always runs to me and gives me love. “Go figure, ” says Richard, “the Fed says they are going to start tapering their bond purchases, the very thing that has been spooking the market for months, and instead of going down, the market goes up like gang busters…it’s crazy!”
He was right, of course, and we were both wrong to assume that the market would give a reasonable response to what has, all along, been unreasonable behavior. The logical question for months has been why does the market go up when the Fed thinks business stinks so bad they have to prop it up by printing money?
Logic counts for nothing at major turning points. The most active players are traders, most of whom are not very bright. Lately, it has been hedge funds, using other people’s money, playing the carry trade–meaning they are borrowing money at near zero interest to leverage their investments. If the economy improves, interest rates rise, crimping the carry trade, so the trader’s vote for continuing the money printing game.
Yesterday’s action was counter intuitive. Word was out that the Fed would begin tapering, so dumb traders (there are lots of ’em) got in front of the news by shorting heavily, expecting that the market would tank when the announcement was made. And it did, for about thirty seconds. Then the really big traders (the smart ones) came in and bought the market like mad, forcing the dummies to scramble to cover their shorts, giving earlier buyers a hugely profitable selling opportunity. Are you getting any of this?
Perfect logic. Richard and I should have thought this out beforehand and bought the market the day before so we could stick it to the shortsellers. But you can’t think of everything.
Meanwhile, it’s still a bear market rally, and when it is over, logic will turn stocks back down.