Looking For The Reason

Long time readers know that when markets do something unexpected – such as breaking a 3-day losing streak with a surge of 184 Dow points – I need to know why. And while I haven’t forgotten that I’m in the middle of a series on “how to outperform” when designing portfolios (with the next segment slated to cover the three primary ways one can add alpha), I believe yesterday’s sudden and rather surprising rebound in the stock market deserves our attention on this fine Tuesday morning.

Given (a) the happenings in North Korea over the weekend, (b) the fact that the market’s 3-day decline left the S&P in a precarious position from a technical perspective, and (c) there is a clear downtrend on the charts, one might have expected Monday’s action to represent an important test of the key line in the sand. But instead, stocks rallied out of the gate and then proceeded to spike higher into the close yesterday. Interesting.

A Myriad of Reasons…

The popular press provided a myriad of explanations for the action. There was talk of traders breathing a collective sigh of relief over North Korea and Afghanistan. There was VP Pence talking tough. There were the China GDP numbers. There was a host of weaker than expected economic data (more on why that was seen as a plus in a moment). And, of course, there was a discussion of the earnings parade. However, none of the above appeared to provide a reason for the spike that began around 3:00pm yesterday afternoon.

Sure, the fact that Pence made it into the DMZ between North and South Korea unharmed was a plus. And most felt the VP’s announcement that “the era of strategic patience” with North Korea is over, was the right thing to say. (Note that Pence added this morning that all options, including unilateral military action, is on the table here.) Oh, and word that China will apparently commit to helping dismantle North Korea’s nuclear program was certainly encouraging.