Why Stocks Don't Go Down: A Primer

Why doesn't the market go down any more? That is the most common question I am asked.

Actually it does go down. The S&P 500 has been up 21 days in 2011, down 11. So two out of three, it's been up. That's still pretty good.

All the major indices are again at new highs today...and it is about to get even more interesting.

The Nasdaq is within 1 percent of breaking through its 2007 high of 2,859 (still a long way from its historic high) and the Russell 2000 is within 3 percent of surpassing its 856.48 historic high on July 13, 2007.

There's three factors driving stocks:

1) the improving economy;

2) notable inflows into stock mutual funds, both domestic and international, coupled with outflows from bond funds and more aggressive stock buyback programs;

3) the Bernanke put—or QE2—or Permanent Open Market Operations (POMO), whatever you want to call it.

The exact impact on stocks of the Federal Reserve's ongoing effort to pump money into the economy by buying Treasuries is controversial, but there is not a trader on the Street who does not believe that QE2 is the critical factor in the rise of the stock market.

Go to the New York Federal Reserve websiteand look at the money being pumped in every day:

$6 to $8 billion tomorrow, $5 to $7 billion Friday, $6 to $8 billion Monday...it goes on and on.

This is the Bernanke put—some cynically believe the Fed will not let the market go down appreciably at all.

I don't believe that, but you are a fool if you do not take the Fed at their word. The lynchpin for the Fed is that rising equity prices will create a virtuous circle of economic activity. Mr. Bernanke himself has cited the positive effects his activities have had on the stock market.

Many traders are more than distressed by this policy...they're apoplectic. "QE2 is the exercise of fiat printing to raise asset prices in order to 'trick' the 'moneyed class' into doing the things that create economic activity," one exasperated trader wrote to me recently. "Problem is, it only rewards speculators and the very wealthy...the inflation confiscates wealth from everyone else because base necessities (commodities) go up and wages remain stagnant."

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