Stock Market: Today´s Lecture

(Drivebycuriosity) - Today we got another lecture how the stock market works. In the morning we learned that US factory orders grew 0.6% (excluding volatile air craft orders) in August and that the weekly jobless claims stayed below the mark of 300.000. Both numbers are more signs that the US economy is sound and growing in a solidly pace.

But nevertheless,  US stocks tanked. The S&P 500, the gauge for the US stock market, lost 1.6%, the Nasdaq, which represents technology, dipped 1.9%.

The discrepancy between stock market and fundamental news today is a reminder that we have to separate between long term and short term. Since spring 2009 US stocks climbed around 200%, mirroring the advancing economy. In the long run the fundamentals rule.

But in short term the stock market often ignores the fundamental facts. In short term the stock market is ruled by gamblers like hedge funds and other speculators.

Those players don´t give a rat´s ass for the fundamentals. They have are very short time horizon. Most hedge funds and other speculators are just making bets on the very near future.

Hedge fund managers are known for their herding behavior. They seem to buy and sell the same stocks, at the same time, and track each other's investment strategies, reports the Wall Street Journal (hedgetracker).

It seems that many hedge fund managers sold today just because their colleagues were selling. As usual on those days they behave like a herd of cows that gets in panic and runs in a stampede when lightning strikes.

Maybe they made bets that the majority will sell more in the coming days which could send the stocks lower. Maybe they let their computer programs do the trading. Then the computers sold because the market went down (sell tricker). This leads to the usual snow ball effect: Selling trickers more selling.

What we experienced today was just a lot of noise - a phenomena of mass psychology & weird herding behavior - and will soon be forgotten.