Professor Elam

In a bull or up stock market, all news is eventually bullish.  This means that whether it sounds good or not, the spin is such that it eventually translates into higher prices. Conversely, in a bear market, all news is eventually translated in to lower prices. The reason for this is not so much fundamental, as psychological.  All companies do not stop making money in the same moment. Indeed many will continue making good money throughout the bear market But the negative crowd psychology will lower expectations which lowers the P/E or price earnings ratio. Accounting and finance students will recall that the P/E measures how many dollars investors are willing to pay for one dollar of earnings.  At a bull market peak, such as the dot.com frenzy of 2000, investors will pay lots of money for stocks that have no earnings, the dot.coms.  At a bear market valley, say December 1974, investors pay very few dollars for even the earnings of the most substantial companies.

Now I told yo all that to set the stage for this article.  Yesterday the DOW industrials were up about 150 points. Yet this morning the news is that a French Bank has about given up trying to calculate asset values in American hedge funds.  And so the Dow Industrials DJIA, which will not start trading here for another hour and a half by the way, fell 90 points.  Okay, how is it possible that the Dow Industrials fell before they even opened for trading in New York?  The answer is that various exchanges around the world offer futures or derivative trading in stock indices, including the DJIA.  But note that it was not just mortgage and real estate companies that fell in value, it was the entire DJIA!  This is the result of negative market psychology.  We are making the turn from a bull to bear market. Just yesterday the President (of the USA that is) announced that he was confident the markets would regain their footing.  He would not have issued the statement of course if indeed he was not worried whether they will or not, he was trying to calm the market.  This morning at least, that did not work.