Newspaper headlines tomorrow will be screaming about how the GDP number was responsible for the huge rally in stocks today.  Don’t believe it.  Here is what has really played out.  Over the past five days, stocks have weakened as the dollar has gained some strength.  (Remember that traders are almost universally bullish on stocks and bearish on the dollar.)  But this five-day setback caused some traders to beging to sell stocks and cover short positions of the dollar.  Many traders also decided to change the bet entirely and bet against stocks and on the dollar.  Rolling into the close last night, chart formations for both the dollar and stocks had come to a point which indicated that either the market was really ready to rollover and plunge or an immediate reversal and recovery would ensue.

The GDP number this morning was fine, but it was as expected.  There was no surprise.  It was also clear that cash for clunkers and the home tax credit were the factors responsible for most of the growth, and that means it is most likely temporary.  But, the number was good enough to start a slight currency rally against the dollar.  This led to a commodity rally, which in turn fed into a stock rally.  In the good old days when you had normal investors and the standard traders and fund managers, the reaction would have been more subdued.  But in this environment, markets are under the control of a small band of mega-trading accounts that run their trades off mysterious algorithmic programs.  These high frequency traders tend to all run in a herd.  Once the GDP triggered the first minor move, this signaled the programs to reverse trading in all markets, since the key technical level had not been breeched.  This meant that anything sold or shorted over the past five days was repurchased.

These traders can’t control what the markets do from a long-term perspective, but they have total control over the way the market will trade at critical junctures.  Had GDP been weaker than expected, the first trade would have been a stronger dollar which would have triggered a massive wave of selling in commodities and stocks.  All of those high-frequency trades would have been more sells and not buys.  Market pundits, business writers, and the talking heads on CNBC all pretend everything is still tied to fundamentals and sound investment philosophies.  Don’t believe it for a minute.  It’s a different game now.  Just understand that.  If you like the economy and being invested for the long-term, that’s fine and act accordingly.  If you are unsure, do not let the arcade games being played on Wall Street influence you.  It’s their game and your only roll is to either give them money or stand aside.