Can someone explain the apparent connection betw. stock market

[Sinistrous]

declines and incidents of terrorism? I read in Reuters today that the losses in the DJIA and other indexes are due, at least in part to the Madrid train bombing.

Can somone walk me through the rationale for selling off stocks because of uncertainty -- or whatever -- that stems from the terrorist attacks?

Please be gentle. The stock market game is not my long suit.

[BlueEyedSon]

1. Fear = down, greed = up.

The primary motivating forces behind the moves of the market are Fear (down) and Greed (up). Also, the market hates uncertainty.

And while "rational" people know there is no more chance of terrorism (specifically an act that would directly effect business) today than last week, that possibility is on people's minds since the actual event in Madrid.

[Sinistrous]

4. So the causitive factor is emotion/psychological and not due

to other impacts that can be traced by a rational analysis?

Thank you for your input. I will now try to get my mental arms around what you said. Actually, I had a hunch the answer was what you stated.

Thanks again.

[BlueEyedSon]

5. It's a self-fulfilling prophesy.

Let's say I'm an active trader, and I sense fear due to some news story. I know that fear will make the market go down. I want to sell to get out AHEAD of other players (so I'll lose less on my position). When people are motivated to SELL prices go down.

Most short term moves are psychological, not based on the underlying value of things (minute to minute, how much does the true value of GM change for example). Over time the price will tend to settle back to something more reflective of "value".

This is oversimplified, but you get the gist.

PS There are traders who use this as a strategy to make money, it's called a "news reversal". Wait for the dip and buy for the recovery phase. If it's an event the size of 9/11 you might have to wait a while to buy or you'll get hurt trying to "catch the falling knife".

[rfranklin]

2. Crowd psychology....

Everyone knows that the market is way beyond any reasonable valuation. Almost no one wants to leave any money on the table. But when there is a news event that may affect business, there is a stampede to the exits. It is a great time to make money by shorting stocks. And most smart money sold their shares last week when the S&P blipped over 1160. Insiders (company execs) have been selling, selling, selling record amounts of stock. so, once again, Average Joes will be left holding the bag as the stocks sink into the Bush Depression.

[MsUnderstood]

3. I think it is the fear factor

When terrorist hit, they affect the economy by causing people to horde their belongings and to stop purchasing luxury things (big screen TV, vacation, eating out) because of the worry that doing fun things could be dangerous. People who are investing put their money in "safer stocks" and get out of risk industries.

The stock market analysists understand that spending will be down so companies will make less money so their profits will be less so stocks will have a lower value.

Think of this analogy--if there is a guy running around your neighborhood you will usually choose to stay inside and lock the doors over going out and washing the car or having a BBQ.

[DoBotherMe]

6. The reason I got out

I received my monthly statement the end of February and the account had gained some significant value. I had been thinking about getting out because of the tremendous loss I incurred in the telecom scandals. I am in partnership in small a engineering firm and business has been horrible this past year so money is tight. I decided to take what was left and get out until the stock market crooks (Enron, Qwest, Worldcom, Adelphia, McLeod) are in jail. The BA began the smear campaign (the lies and chaos and world instability continue). I had lost all confidence in the stock market. My decision just happened to coincide with the bombing in Spain or it may have been the last straw!?. Dana ; )

[DinahMoeHum]

7. Most of it is emotion, which includes greed and fear.

Greed and fear are the two sides of the coin of emotion.

The legendary investor Warren Buffett says: "You have to be greedy when everyone else is fearful, and fearful when everyone else is greedy"

I just got my April issue of Smart Money magazine. I recommend that you read the article on Sir John Templeton (starting page 107). He's another contrarian investor with a philosophy like Buffett.


:bounce:

[rapier]

8. notes

The news, terror related or otherwise, doesn't move the markets. I know most won't belive it.

Read my little post on this from another thread here:
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x7054

#5 post.

I'll recap here: Event A caused 'investors' to sell stocks today blah balh blah blah blah.

Nice story. Pick any event that coincides with the markets move and label it causal. It sounds right. It's bullshit, bullshit, bullshit.

The stock market has not had a significant setback in months. An obvious bull run started in 10/02, that is 18 months. The markets have been unable to break thru the highs made in January. In other words the market has met 'resistance', which means new buyers are becomming scarce. Bullish sentiment has never beeh higher for a longer period. NEVER! Everyone has thrown all their money at the market already is what this says.

In other words a moderate selloff now is to be expected, at least. Or maybe expected is the wrong word. A selloff in this period is well within the probabilites established by market history. History says a very significant top my be forming. Maybe yes, maybe no. Well within the realm of possibility. If so nobody in 6 months will recall the Madrid bombing as the 'cause' of a bear market.

Markets move on the flow of money into and out of them. There is never any one 'cause' for these inflows and outflows.

[Sinistrous]

9. Thank you all for your comments and insights. n/t

.