Revealed: The Real Reason for Yesterday's Big Rally

Reporter:  "Why did you lose this game?"

Manager:  "We lost because the other team scored more runs."

The stock market gained about 6% yesterday, posting the biggest one-day gain in months.  What caused the rally?  

On days with big moves, everybody's asking.  "What's causing this rally?"  Very often, there's no real answer.  But that doesn't stop people from offering explanations.  Clients ask brokers and traders.  Traders ask each other.  Reporters and analysts review news reports and sources in an effort to find something.

Most news reports attributed the rally to reports that an internal Citigroup memo broke unexpected good news about the company's profitability.  However, I'm pretty sure that it was not the cause but merely the most convenient explanation.  The memo to employees was clearly designed to be a morale booster.  Having seen many such memos while I worked for a Wall Street firm, I can tell you that significant, market-moving news is never disseminated in this manner.  As the Financial Times noted today:

"If management e-mails actually "communicated" anything they would be banned.  Risks of a leak means workers are subjected to anodyne words on how valued they are or that their company is uniquely positioned to cope with the challenges ahead."

Also, public companies are extremely sensitive to the requirements of SEC Regulation FD,

which prescribes specific ways to disseminate material nonpublic information.  CEO Pandit would not have offered important new news in an internal memo.

There were a few other explanations-- possible return of the uptick rule, Bernanke comments, etc.  But it took even more of a stretch to believe that they caused the huge rally.

So now I'll reveal the real reason for the rally:

More buyers than sellers.

Yup, that's it.  More buy interest--lots more-- pushed prices up.  I'm not trying to be funny, but it's important to understand that on any given day a multitude of small factors combine to produce market action.  Occasionally there's a specific market moving event:  a big earnings surprise  from an important company, significant economic reports, Fed action, or significant non-economic news.  But on most days, there's no real reason for the market to have moved up or down.  That's just the way it works.  However, you'll never see this headline in the WSJ:  Dow Down 200 Points-- No One Knows Why.  

Last Monday, March 2, was a bad day in the market.  The S&P 500 declined by almost 5%.  Just before the close, I heard a radio reporter explain that the market's weakness was because Warren Buffett, in his annual letter to shareholders published the prior Saturday, had warned that the economy "will be in shambles throughout 2009--and, for that matter, probably well beyond..." 

While it's true that Buffett said that, it was hardly market-moving news and almost certainly not the reason for the selloff.

So here's my point:  The stock market is not an entity that can be meticulously analyzed and catalogued.  Thanks to the internet, cable news, and a heightened public interest in the market over the past 20 years, there's lots more information available.  But much of that information is useless or worse.  Don't overanalyze it, and don't pay attention to anyone who tells you that they can explain every tick.  The best investors know what they don't know, and there's quite a lot that they don't know.  Be particularly suspicious of anyone who can tell you where the market (or an individual stock) is going to bottom or peak.  

And I'll bet you a dollar that within the next week you hear someone on TV or radio tell you that the market fell on "profit taking" or rose on "bargain hunting."