What is Causing This Stock Market Rally?

With the stock markets catapulting up to over 70% from their lows experienced in March of 2009 you start to question what is causing this stock market rally? Let’s look at some facts. There has been a dramatic decrease in trading volume during this market rally on the NYSE. Of the daily trading volume well over 60% of it has been due to program trading. Mutual fund outflows are setting new records as retail investors have either lost faith in the stock market or need to keep their money aside due to barely making ends meet from poor conditions in the economy. The number of outstanding derivatives has grown from ten of trillions of $dollars (before the crash in 2008) to in the quadrillions of $dollars (1 quadrillion is a thousand trillion).

Revenues are down for investment firms (with further lay-offs at these firms pending) due to lack of participation from the retail investor in the stock market. Near zero precent interest rates imposed by the Federal Reserve Banks has spurred an increase in high risk investing as there is simply nowhere else to park money to receive a decent return. With the economy being weak and most of the growth coming from one-time incentives by governments as well as auto makers and retailers trying to boost sales it makes you wonder how long can this stock market trend keep going up?

With a second residential housing dip occuring and further debt crises’ forthcoming in the area of commercial mortgages/loans, corporate bonds, student loans, automotive loans as well as state and municipal debts, this will have a big impact on the performance of the stock market. Will it be eventually higher interest rates that cause it to come back down to reality (the Fed Chairman Ben Bernanke has guaranteed to keep interest rates low until later in 2011)? Will it be history repeating itself as in 1987 where program trading had caused the biggest one day percentage drops in history for the Dow or the 1929 crash where leverage investing (derivatives) had ballooned to excessive levals and many investors had to sell to cover their margin calls? Only time will tell.


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