Why Can the Stock Market Rise When Economic News is Mostly Negative?
by Marc Hanson

Why can the stock market rise when economic news is mostly bad?

First, I suggest that many upward moves are because traders and momentum players, as well as many large institutions, are simply buying indexes. That moves every stock in the index up, as each stock must be bought for every index share bought.

Secondly, index buying is indiscriminately pushing up market values, and thus any recent rise is not a response to earnings "growth" in the last quarter. If it was a response to earnings, then the market action would be focused on companies with just good earnings announcements and which represented good value.

But if values are bad, and the economic news is mostly bad news, then how can stocks go up?

It is because stocks are bought and sold "on the margin." Let me explain this term.

Let's assume the entire investment universe is composed of 100 investors. Ten of these investors are active traders. They are in the market every day, buying and selling. 25 of the investors are buy and hold. They only buy and never sell. 25 are negative about the market, and they own no stocks. The other 40 will buy or sell stocks depending upon their economic outlook, sentiment and need for cash.

But these 40 are not active traders. Only 5 of them may be trading on any given day. If there are 3 buyers and 2 sellers, there is "buying pressure." If 4 are buying and only 1 selling, there is even more buying pressure. The traders try and sense the direction of the "pressure," and trade stocks based upon their analysis of the 30 or so potential investors. (Yes, the buy and hold guys will add to the buying pressure as they increase their positions, but they also are forced to sell every now and then as well, so that equals out in my imaginary world.)

Thus, a relatively small number of investors can influence the direction of the market on any one given day. These are the investors who are the "margin" of difference, so to speak.

Marc Hanson is editor of the Mutual Fund/401K Wealth Strategy Newsletter and heads up MVH, Inc., which produces Secret Stock Market Wealth Strategy.

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