Should the Market Ever Go Up 7% in a Day?

  • Share
  • Read Later
Toru Hanai / Reuters

In a poor economy and a market that is trading down on most days, a drop of 7% may be breathtaking, but it is not unexpected. With predictions of 7% or 8% GDP contraction and 9% unemployment by the end of the year, stocks should rarely trade up. A 7% increase in one day has to be a mistake. (Read about the one day jump in the stock market)

The rally that took the S&P 500 up 6.4% to 720 got most of its fuel from bank stocks. Whipping boy Citigroup (C) moved up 38% and that pulled other banks such as Wells Fargo (WFC) up almost 20%.

What appears to make little sense is that the rally spread to firms that have nothing to do with the financial and banking sector. Intel (INTC) rose 11%. PC sales are still expected to plummet this year. Shares of TIME Warner (TWX) soared 13%. The company's studio released Watchmen, which was No.1 at the box office over the weekend but since TWX is in several large businesses beyond films the increase is inexplicable.

Some observers argued that there was pent-up demand to buy stocks. The market has been going down so rapidly that investors have been dying to get back in. This point of view is only defensible if there is evidence that individuals and institutions with capital to invest will buy stocks every time that they see a rally. If, on the other hand, this is just a herd instinct working, then investors can consider themselves no more intelligent than lemmings.

People who wanted to invest money in the market saw what they were waiting for in a few pieces of news. The first was that Citigroup CEO, Vikram Pandit, made public remarks that his company had a profit in the first two months of 2009. But, even school children who hone their skills trading mock accounts online know that two months do not make a quarter, especially in banking. Some auditor may mention that Citi's toxic assets ran into more trouble in this quarter or that its consumer credit and LBO businesses needed to be adjusted for bad debt. Simply put, Pandit's comments did not mean a lot.

GE (GE), whose stock has dropped at an extraordinary rate, gained 20% which added $15 billion to its market capitalization in just a few hours. The good news from the conglomerate was that it sold $8 billion of bonds under a program backed by the U.S. government. That means GE is very close to its goal of raising the $45 billion it wanted to get from the debt markets this year. GE also benefited when a skeptical analyst said that a recovery in the financial market held a number of benefits for GE.

But, as GE appeared to prosper, the second-largest conglomerate in the U.S., United Technologies (UTX) said it would fire 11,600 people and cut its financial forecasts. In the current environment, it may be considered shrewd business to cut the payroll. However UTX's management did not inspire confidence when it revised its forecast down sharply.

There were several other pieces of news to sift through, and some of them were Trojan Horses. Ben Bernanke, the head of the Federal Reserve, said that the economic recovery might still begin in the latter part of this year. What was not so well reported was that he said it could only happen if the banking system was fixed, a process that may actually take years. The price of oil has been moving up which usually means that the market expects that individual and industrial demand will improve. It also means that it may cost $4 a gallon to drive a car.

Hidden among the verbiage were two parts of the economic forecast which mattered most. One was that almost all indications show credit tightening, "Unless we start seeing a reversal of the widening of a lot of these credit spreads, any equity rally is going to be short-lived," said David Lutz, managing director of institutional trading at Stifel Nicolaus, in an interview with CNBC.

And, barely mentioned was the fact that spreads on credit-defaults for U.S. debt have been rising sharply. More and more traders are willing to bet that the American government will not be able to make payments on its rising pool of debt.

The wheels are still coming off the bus. There are not going to be many days of 7% increases in the stock market indexes.

Douglas A. McIntyre

See the 25 people to blame for the financial crisis.

For constant business updates, go to 24/