Stock Market Slammed on Great Economic News - Really!

Last Updated May 4, 2010 8:54 PM EDT

Don't believe a single thing you read in the press about the short-term movements of the market, and here's why.

Let's take the example of the Associated Press trying to explain the Dow sinking over 200 points on the morning of May 4, 2010. Below is the listing of the "top stories" from Yahoo Finance late that morning.

Top Stories
Stocks Slammed on Greece Debt Concerns; Dow Sinks More Than 200- AP
Stocks are sinking Tuesday after European debt problems sent another wave of pessimism through the market. The Dow Jones industrial average fell more than 225 points. The Dow and broader indexes each fell more than 2 percent. » View more top stories
When intuitively obvious isn't
I admit that worries about Greek debt seems like a logical enough explanation, at least until you stop to think about it. What had actually changed about the Greek debt situation from the day before when global markets rallied? As far as I can see, the only news on Greece was about how the European nations were rushing to the aid of Greece - a positive development. Isn't the market supposed to react on new news?

Other market news
Moving on to other market making news of the day, let's take a look at the top three headlines above. You decide whether this is positive or negative news.

Pending home sales rise 5.3 percent in March
If you read the article you will see that contracts on homes "surged more than expected in March." It may just be me, but I consider this positive for our economy.

Euro at year low against dollar
I was reading stories not too long ago on the necessity of a rally for the dollar so that U.S. stocks could rally. In actuality, the U.S. stock market rallied when the dollar declined. The movement of the dollar appears to be the equivalent of the media's wild card - movement in any direction can always explain the stock market.

March factory orders up surprising 1.3 percent
The Commerce Department announced a 1.3 percent increase in factory orders instead of the expected 0.1 percent decrease. A nice expansion versus an expected small contraction is also a good thing.

Did the market get it wrong?
So, with all of the good news today, the market should be surging instead of getting slammed, right? Unfortunately, what the market does in the short-run is unpredictable and even unexplainable. It's basically some random variation.

Human beings hate randomness so my headline "Stock Market Slammed for Reasons Unknown" just isn't very satisfying, even though it's far more logical than the explanation used by the press today. Wouldn't surprise me in the least if people take the real headline and decide to dump European stocks and perhaps bet on the dollar, or some other buy high/sell low performance chasing.

My advice
The people who write explanations of short-term stock market movements are really only guessing. Learn to ignore those headlines of why the stock market does what it does on any certain day, or at least take them with a grain of salt.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.