Why does a junk stock rebound when you think it is going to zero? Why does a monster stock that you think will run another 100 points based on fundamental valuations suddenly fall 20%? Why do stocks that have blow out earnings then fall 5%? What is going on? What causes trends to go farther than anyone could have imagined? Why are the markets so counter intuitive? Here are a few reasons why these things happen that seem so unlikely:
Trends: Trends are simply caused by money following into or out of an investment day after day. As new money comes in the new buyers pay more for the existing buyers to give up their positions that are profitable. The same thing when a stock is out of favor every day more people are trying to get out of a losing trade and have to take whatever is being offered. When there are strong beliefs about inflation, money flows to gold as perceived inflation protection. If there is a disruption of oil supply speculators take long positions to profit. If a company is perceived to have growing earnings dollars chase the stock in hopes of an increasing stock price to go along with those earnings.
Dead Cat Bounce: Why would a junk stock with no earnings and accounting irregularities suddenly bounce 5% in a down market? Usually this is caused by traders short the stock buying back their borrowed shares at an opportune time, bottom fishers buying shares at what they perceive as a great price, and a lack of scared sellers to give the newcomers a great price becasue they have already sold when it becomes late in a death spiral. This is the perfect storm for a bounce, however these are usually short lived and the lack of serious buyers usually causes the death spiral to continue in the bid down in price.
Monster Stock Reversal: How in the world can Apple not be at $150 a share? How could it fall back under the 50 day moving average after good earnings? Well for a few reasons. At some point everyone has purchased Apple stock that wants it, the paper boy, every trader, every mutual fund, almost every hedge fund, etc. There comes a point in time where we simply run out of enough new buyers to bid up the price, instead we have new buyers waiting to get in at lower levels, as the price tops and begins reversing and fishing for new price levels current owners begin the profit taking process. We will not find support and start back up until we are at the levels where current holders will not sell and new buyers are eager to come back in and start building positions. This is many times the 200 day moving average or the 30 RSI.
It is not a matter of more buyers than sellers; they are always equal. It is a matter of an agreed upon price between the current seller and buyer. The biggest driver of prices in the stock market is not fundamental valuations it is the greed of wanting to make money and the fear of losing the money you have, these forces drive stock prices more than anything else.