Why We Don't Know What Makes the Dow Move

Like other market watchers, we at The Motley Fool try to breathe life into day-to-day movements of the Dow Jones Industrial Average (INDEX: ^DJI  ) , Nasdaq Composite (INDEX: ^IXIC  ) , and S&P 500 (INDEX: ^GSPC  ) . We look at the ebb and flow of the markets and do our best at explaining why X, Y, and Z are happening.

But what if those explanations are absolutely wrong?

Take today, for example, where the Dow was up more than 1% for much of the day, leading analysts like yours truly scrambling to make sense of the movement.

The Wall Street Journal weighed in on the jump, with a headline that read, "Stocks Surge, Possibly on Bad Ohio Polling Data." To explain the backstory, a certain Gannett newspaper in Cincinnati accidentally published a page with dummy text showing Republican presidential nominee Mitt Romney ahead in Ohio by more than 90,000 votes. Of course, no votes had been counted yet, let alone released, since the polls were still open, so the margin was impossible to know. The newspaper eventually pulled the report, admitting to the error. And the Dow went up more than 1% on that news?

I don't think so.

To be fair, the Journal eventually poked holes in its own prognostication, seeing that the markets stayed strong after the Cincinnati Enquirer took down the dummy report. But what this really shows is how difficult it can be to make sense of the stock market. On days when the markets are moving in a big way, we look to macro events to see why investors are buying or selling. Those investors are human beings, after all, and major events are catalysts for those buy and sell decisions.

But on days like today, when the United States is almost solely focused on election coverage, it's tempting to go beyond the broad "elections boost stocks" story and instead look at a specific event as the real catalyst for the day's market movements. But as we found out, those specific predictions are often wrong and can leave the analyst high and dry.

This isn't to say that we shouldn't try to make sense of the markets or ignore major events, but we should be more careful in giving credence to bold pronouncements when the evidence is lacking. We at The Motley Fool won't stop trying to understand what makes the markets tick, but we'll try to keep our guesses as educated as possible.

Be sure to hold us accountable.

Speaking of elections
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  • Report this Comment On November 06, 2012, at 5:52 PM, greenwoodcreaker wrote:

    you say "Those investors are human beings, after all, and major events are catalysts for those buy and sell decisions".

    uh.... I don't think so. c'mon, human beings wrote the computer programs, but the humans are no longer doing the trading. it's skynet (sorry for the terminator reference....)

  • Report this Comment On November 07, 2012, at 11:17 AM, crash2012 wrote:

    Montley, your way of base. Consider the bank collapse in 2008 and how the dow moved in that direction. It wasn't magic, it was common sense. Ohio had nothing to do with it. It's the systemic factor of who's in charge of this economy. And Obama is not trusted by investors.

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