Why Stocks Are Down On Good News

Decent September existing home sales, good comments from Microsoft , almost all companies beating earnings expectations...and the market droops. What's up?

There are several factors behind today's weakness:

1) while home sales were strong, many analysts believe the expiration of the first time homebuyer tax credit greatly inflated the figure, so it is being discounted heavily;

2) while the news is still good, the big advance in stocks in the last six months means you don't get as much of a pop when you are trading at 19x earnings, rather than the 16x earnings we were trading at a few months ago (market is tired);

3) perhaps the most important issue is the way the dollar is now being used. It's a dollar carry trade, with the dollar being used to buy other assets around the world, much as the yen was used previously.

What this means is that any signs of economic strength means a higher likelihood that interest rates will go up, which will increase the cost of using the dollar for the carry trade.

That causes the dollar to go up on short covering, which puts pressure on stocks.



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