What’s Up with the Stock Market?

[powayseller]

Here we are at the brink of recession, the housing market posted its first year over year nationwide decline since 1995, our fiscal and trade deficit is at record highs, and the stock market is going gangbusters.

I still don’t believe the market is efficient. If it were, homebuilder stocks would be going DOWN, not UP, and the stock market would be pricing in the upcoming downturn, instead of the false hope that the economy will be revived due to Fed rate cuts and falling gas prices.

I have already priced in the downturn, but I guess I was too early. Perhaps the stock market is so efficient, that it can price in the future of the economy with just a few weeks’ lag.

Anyway, I’m just wondering why the stock market is going up?

[rseiser]

I think this is just how markets are. People predict the future, but they also predict what other people do. So when one person starts to buy, some others might see that and just buy, because there could be more guys like the first one buying. And then of course you have people like Cramer who declare that the homebuilders are great buys, because “they have stopped going down”. (He was right, but for how much longer….?)
Clearly, not everyone in the universe thinks that housing prices and home-builders will go down. Some people could be totally stupid, too. There are already plenty of people declaring that this is the bottom, we had our correction, and now it will recover again. There are also people who look at static numbers, and they just buy when P/Es are 6.
This is just how markets are, otherwise we would drop every single day, and no day would be higher than the previous until the bottom is reached. This is obviously not how it works.
Anyways, I declared this to be the stock market top in my other post. (Note, how slick I linked to a particular post on a follow-up page, using page and comment number.) So let’s see what happens.

[LookoutBelow]

If you follow "Elliot Wave Theory" we are entering a Kondratieff Winter phase.

There is evidence (unproveable at this time) that there is some "offshore" govt intervention and manipulation. Google up "Plunge Protection" and read what you read and THEN decide if the market your "investing in" is not a rigged game.

I got out 2 years ago, it may or may not be the case, but Iam not willing to take that type of chance with my resources when thee is some feasible evidence that this is going on. I like to error on the side of conservatism when the results make the difference of whether or not I have to hang up the surfboards and go back to work. 

"Life is too short for a full time job" 

 

[Anonymous]

While the dot com bubble was bursting people found a new place to invest their money and that was real estate. Where are people going to put there money now that real estate has fallen out of favor? I think it is the stock market. I am in tech and have seen many tech companies disappear and even more vanish through M&A. There is much less tech stock outstanding than even a few years ago. Get ready for Tech Bubble 2.

[anxvariety]

Gov is printing money and dumping into the stock market.. one last hurrah, everythings fine!

[powayseller]

ronnieb, you have a point. There is so much global liquidity now, even more than in 2000. Where are all those stock market investors going to put their money? They are going to see a slowdown in the economy, but if they take their money out of the stock market, where will they go? Treasuries, which are now paying a decent return? Not real estate or MBS, which are now showing their true risk? Euros or swiss francs? With no place to go, could they stay in equities? Will they switch to emerging market funds? Maybe commodities? They could start buying gold?

[sdduuuude]

I think you are misunderstanding the term “efficient” as it applies to markets.

An efficient market is one where the price fluctuates to ensure that supply and demand are always equal. The extent to which supply and demand are not equal is the extent to which the market is inefficient.

With this definition in mind, I can’t think of any markets that are more efficient than the publicly traded stocks and commodities market.

Just because you don’t understand the supply and demand side of the stock market (i.e. who wants what when, and how much are they willing to pay, and who wants to sell when and how much they want) doesn’t mean the market is inefficient.

Efficiency isn’t a function of buyers’ preferences, just the price adjustment.

Granted, though, the stock market can be confusing.

[poorgradstudent]

I personally think the stock market is going to hold level for a short term, then go up again in the long run. The first half of the year the market was in a minor slump based off of investor concerns. Prices are actually somewhat low right now on a lot of good, recession resistant large companies. For a long time the market has been obsessed with growth, and neglected large value stocks.

There’s money to be made in the market even during a recession.

[MH]

SDDuuuuude…

Has been a bit since I was an undergrad, but could have sworn that the “efficient market hypothesis” is the one that says all equities are priced fairly as all available information is reflected in the market (discounts the availability of inside info, stock pickers, etc.).

[powayseller]

I’m with MH. Efficient markets means all information about the markets and each stock is available to all investors, so the price of each stock is precise and accurate.

I don’t buy it though. Why did homebuilders go up recently? Why are some stocks trading at PE/s over 15? Why was there even a tech bubble, with stocks earning no profit trading at high prices?

I don’t believe in efficient markets. None of the current pricing makes any sense to me. Besides, some companies play with the numbers too. Fleck had an example of a company that came out with just-before-closing-bell earnings warning which made the stock take a hit, and then in the thinly traded after-hours market they announced they would have a much better year going forward, making the stock rise again. We also have shorting and options and all kinds of trading which further distorts the true value, as those people treat the market like a casino table, rather than being true investors which pay for a stock what they think it is worth. They are buying only for short term holding to play small changes in the price.

Maybe markets were efficient before all the games and the before the speculators took over.

To me, the stock market does not reflect the accurate value of a company’s stock. It just shows what a bunch of speculators are willing to game it for, at this moment.

[sdduuuude]

MH – you are correct. It is all about how prices adjust. I say it adjusts to make supply = demand, the theory says it adjusts to take into consideration all information. Pretty much the same thing, but I’ll stand sort-of correctd.

Still – just because the stock isn’t doing what powayseller thinks it should do doesn’t mean it is inefficient.

In your terms – the stock price reflects ALL the information available to all investors, not just the information available to powayseller.

Also consider, the same information can be interpreted differently by different people. Some may be in a position to be very hurt by falling interest rates. Such an investor may consider going long on builders as a hedge.

Just so you know – I am currently short on builders.

[rseiser]

See my previous post. Amen.

[sdduuuude]

“Why was there even a tech bubble, with stocks earning no profit trading at high prices? ”

Because the market efficiently reflected people’s beliefs that the price would continue to go up.

When those beliefs changed, the market reflected the change.

You don’t need smart people for an efficient market, only a market that allows the price to reflect their interpretation of the information available to them.

[powayseller]

From today’s Dallas Morning News:

” Finally, investors should not make too much of the recent rally in the Dow Jones industrial average.

The Dow is up about 8 percent since mid-July and seems poised to break its all-time closing high set in 2000.

But while the Dow index has performed well of late, the Russell 2000 index – the most-watched index of small-cap stocks – has dropped more than 10 percent since May.

In other words, the rally is narrow, not broad-based, and that’s typically not a good thing. “

[(former)FormerSanDiegan]

Perhaps the future is not as obvious to the market participants.

[Author]

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