Political  Calculations

Yesterday, we indicated that we have been very busy behind the scenes here at Political Calculations during the past week.

That's a bit of an understatement....

That's because last Wednesday, 26 March 2014, we ran a little experiment with the S&P 500. If you were paying attention to the market that day, particularly around mid-day, you might have noticed:

S&P 500, 26 March 2014 - Source: Google Finance

Certainly, a number of traders and CNBC did, as they apparently got "spooked":

After a positive start to Wednesday's session, the stock market took a serious intraday slide that saw it lose more than half a percent in half an hour, and took the S&P from positive to negative on the day.

While an especially strong five-year Treasury note auction is another likely culprit in the intraday decline, many traders blamed the turnaround on a massive bearish options trade on the S&P 500 that was effectively a multibillion-dollar short bet on the market.

Let's take a step back here. Our regular readers are well aware that we have developed a hypothesis that goes a long way toward explaining the behavior of stock prices. Our basic theory is that investors focus their attention on a specific time in the future when making decisions about their investments today. The price of stocks then follows the expectations associated with what investors can reasonably expect to earn through owning stocks at that future point in time.


Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.

TOWNHALL FINANCE DAILY

Get the best of Townhall Finance Daily delivered straight to your inbox

Follow Townhall Finance!