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Commentary: It's A Mystery Market. Roll With It


Every once in a while, the stock market seizes our attention. It did so Thursday, July 12, when the Dow Jones industrial average rose nearly 300 points, heading toward 14,000. Wall Street broke onto the evening newscasts and back into the minds of investors.

Why did prices soar that day? Nobody knows. Most of its big moves not only are impossible to predict, but can't be explained even after they occur. And here's the interesting part: Far from being a problem, that mystery is key to the market's appeal. We're drawn to Wall Street the same way we're drawn to a spinning roulette wheel, an untested thoroughbred, or a stormy lover.

An exciting stock market energizes the overall economy, argues Aaron Brown, a Wall Street risk manager who wrote a 2006 book called The Poker Face of Wall Street. He points out that intraday trading serves little purpose other than entertainment. The market could simply accumulate orders and execute them at a single price at the close. But that would take away the fun, wouldn't it?

The market's leap on July 12 is a classic example of how a rally can emerge as abruptly and inexplicably as a row of cherries on a slot machine--generated not by economic fundamentals but by the inner workings of the market itself, including the volatile emotions of traders and portfolio managers.

Before the market opened that day, there were few hints that the Dow was about to rise more than 2%, the biggest jump since April, 2005. Stocks were trading higher in Europe, but they had fallen overnight in Tokyo. Wal-Mart Stores Inc. (WMT) announced a slightly bigger-than-expected gain in June sales. A $38 billion deal by Rio Tinto (RTP) to buy Canada's Alcan (AL) raised speculation about a takeover of Alcoa (AA), a component of the Dow industrials. And the government reported a healthy gain in U.S. exports.

So conditions were good, though not great. Stock index futures were up in pre-opening trading, and when the New York Stock Exchange (NYX) rang the opening bell at 9:30 a.m., prices rose to close the gap. Within minutes, the Dow jumped 80 points from its Wednesday close. It then climbed steadily through the morning without much additional news to go on except a drop in oil prices. The market flattened for a couple hours, and then around 2:30 began a powerful rally that lasted until just before the 4 p.m. close--even though by then oil prices were heading back up. "When the market has a bullish sentiment, it turns every piece of news into a positive," says Peter Cardillo, chief market economist at Avalon Partners. "Even the negative news becomes a positive factor."

Don't even try to explain why the mood of Wall Street suddenly turns buoyant for a day. Says Peter L. Bernstein, the author and market strategist: "I have been in this business over 50 years, and I have never understood why all these people on one particular day get up with one thought."

For investors who like big hits, what's intriguing is that a handful of days like July 12 account for almost all of the annual returns from stocks. For example, in an analysis for BusinessWeek, Morningstar Inc. (MORN) calculated that if you missed the 10 best trading days of 2007 through mid-July, your total return from the Standard & Poor's 500-stock index would have been -3% instead of 10.5%. (If you missed the 10 worst days your return would have been 30%, but gamblers tend to focus on the upside.)

Explicable or not, days like July 12 loom large in the psyche of all market participants. For buy-and-holders, they make up for the down days they know they'll suffer through. For players, they're the big wave you don't want to miss. In either case, the lure of July 12 for investors is the same: You gotta be in it to win it.

By Peter Coy


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