Tuesday, July 20, 2010

Huge Market Turn Around, But Why?

The market plunged at the open today, dropping more than 1.50% in the morning trading session. Then, at 9:45am, the market began to rally in a big way, finishing up more than 1% on the day. So what caused a 2.5% move in the market today- a rumor. Yes, a rumor. We were hoping that it was earnings and/or guidance lifting the market, but its not. The rumor is that the Federal Reserve (the Fed) is planning to stop paying interest on bank reserves. Why does this matter? The banks can no longer make interest on cash that they have. This means that the banks will be more inclined to lend this money, so that they can make a profit. As evidence of this rumor, the banks and home builders were the market leaders today. Both sectors saw significant moves higher.

Although this rumor has been denied repeatedly the past week, trader continue to insist that its a real possibly. This action by the Fed would definitely help to boost the economy, but I see this rumor to be other more than a rumor. Rumors are often invented by "big wig" hedge fund managers who are caught on the wrong side of a trade. Instead of taking a loss, the manager will make up a story (wall street lying, who knew...haha) to get the stock price to move up or down depending on whether they are long or short. I think that this is what this rumor was created for- hopefully its true though.

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