Even when the market barely budges an inch, there is no shortage of analysts, pundits, and talking heads ready to give you their explanations for why the market did what it did that day. The worst part is they often give weak excuses for the slight movements in the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 Index (SNPINDEX:^GSPC), or Nasdaq Composite (NASDAQINDEX:^IXIC).
Once you learn to spot this sort of faulty reasoning, you know when there's actual news and when you can ignore the headlines. Although one article can't capture all of the media's go-to excuses, I'd like to highlight some of the most common.
"Stocks are up/down because investors hit the buy/sell button"
While it would be easier to think of the market as a group of investors who simultaneously hit the same button and change the value of your portfolio, this is not the case. Some investors are buying, and some are selling -- it's what makes a market. Not to mention that many of these buy/sell decisions are made by computer algorithms, rather than actual humans.
"Investors sold on increased fears"
Without a source for these alleged fears, the idea that fear takes control one day, disappears, and reappears another day without any news is just too convenient a way to explain market movements. Too often, the "fear" excuse is attached to something that's always volatile, even when there's no relevant news. Other times, "fear" takes a more abstract form and is described like a disease that sweeps over the markets, causing sell-offs. Unless actual events back up the fears, they're just an excuse for inexplicable movement.
"Because of Fed speculation"
Do you know what the Fed will do next? Unless you're a member of the Fed, the only honest answer here is no. In certain cases, the market can be moved by speculation, but this excuse has become a routine play by pundits on days with unexplainable market movements. With the investment community made up of millions of individuals with all sorts of thoughts on what the Fed will do next, saying investors moved the market one way because they suddenly agreed on the Fed's next action is usually no more than noise-making.
The market always has uncertainty, much like life in general. But to say the level of uncertainty suddenly changed from one day to the next without any catalyst is simply to pretend to know why the market moved.
"A bubble deflating/forming"
At times the market has produced actual bubbles, but, listening to financial pundits, it would seem as if everything's a bubble ready to burst. Just because the Dow dropped 20 points doesn't mean a bubble is bursting.
Dissecting the analysis
When a major index moves a fraction of a percentage in one day, analysts, pundits, and talking heads all rush to declare the reason why. The proper explanation for small market movements is often a simple "I don't know." But these people don't get paid to admit they don't know; they get paid to give answers, no matter how flimsy.
As a result, headlines ranging from dubious to downright bizarre make their way online and on TV as these people try to explain the unexplainable. So the next time someone tells you why the market moved today, make sure they back it up before you believe it.
Alexander MacLennan has no position in any stocks mentioned. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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