I'm guessing that many investors were likely left scratching their heads on Friday. After six straight down days, during which time the sentiment toward the global macro view went from bad to worse, an impressive blast higher occurred on Friday. Out of nowhere and on no real news to speak of, the Dow (DIA) surged 204 points. The move erased fully four days of losses in a single session (with the majority of the rally coming in the first 35 minutes Friday morning) and the indices even managed to finish the week in the plus column. And for those keeping score at home, the S&P 500 is now just 4.5% off of its high water mark for the current bull market cycle, which began on March 9, 2009.
So what gives? Why did traders suddenly put away their fear of what might happen in Europe, how far the global economy might fall, what the economic slowdown will do to earnings, and what the Li(e)bor/JPM/PFG/BLS scandals might do to the trust of those few remaining individual investors in the game?
In order to push the DJIA up more than 200 points, there is usually some event (think EU Summit, Fed move, or important economic report) that acts as a trigger. But in this case, all traders had to work with was word that Italy's sovereign debt rating had been downgraded, a report showing that China's (FXI) GDP continued to slow (to the weakest rates since Q1 2009), JPMorgan's (JPM) earnings report (which confirmed that the bank's losses weren't horrific), a PPI report that suggested the Fed does not have a green light for more QE, and the weakest consumer sentiment number (courtesy of the University of Michigan) of the year.
In short, although the Italian bond auction wasn't bad, there was no single news item that told traders and/or their computers to "Buy 'em!" And while some analysts argued that Friday's joyride to the upside represented a sigh of relief rally in response to the fact that JPM's numbers weren't worse and that China's GDP wasn't falling off a cliff, I believe there was more at work in the market Friday.
Yes, it was a summer Friday, so yes, volume was thin. Yes, there was CLEARLY a large amount of short-covering involved. And yes, the algo's were once again in charge (they usually are). However, I believe it was really the fear of missing out on the next big trade that was behind the move.