By  on November 8, 2010

Day-to-day gyrations in the stock market are probably the last place to look for enlightenment — but that doesn’t stop people from trying.

In a news-at-it-happens society starving for the latest speck of information, there’s sometimes just no better way to gauge the state of the world. The stock market seems so definitive, so easy to understand. Stocks are up, so it’s a good day. Markets fall — it’s bad. It’s an economic sports score, the value of which determines everything from 401(k) accounts to pensions and salaries to how much a company might go for in a takeover bid.

Yet the behavior of the market is often completely impenetrable. When there is a clear-cut reason for a rally, traders often overreact. And Wall Street is still skittish over echoes of the 2008 financial crisis, the continuing economic malaise, shifting tax priorities and government debt.

“The markets are kind of stalled,” said Jonathan Low, a partner and co-founder of Predictiv Consulting. “Part of this is due to new technologies, such as those which contributed to the Flash Crash [of May 6]. The market too is trying to find its way. We’re coming out of a period in which there was the destruction of trillions of dollars of value. There is a greater and greater demand for information and transparency.”

That means that, in an unsure landscape, investors want to know not just what management’s estimates of sales and profits are, but also the assumptions upon which they are based. And more elements of a business are open to scrutiny than ever before.

“The corporate barrier that used to be impenetrable is now much more permeable,” Low said. “There is a greater understanding of the importance of intangibles like design and reputation in driving value. Ten years ago would anyone [on Wall Street] have really focused on who the successor to a given designer might be? Now, personality and background and design reputation are very much a part of the calculation.”

That makes the calculation all the more complex.

“I still think that there is a place to have a thesis on a certain stock or a certain sector and make some bets based on that thesis,” said Rajiv Shah, a partner at consulting firm A.T. Kearney and head of its financial institutions group. “You can still see there are these stories around. I think they are more difficult to figure out and they are hard to live with because of the gyrations, because you never really know if you’re right or wrong. [Taking a position requires] a lot more steel and a lot more homework. The days when you could buy and hold and hope for the best have clearly gone.”

Somehow all of the buying and selling — based on mathematics, fear, greed and subjective evaluations of the consumer, management and company strategy — is expected to accurately determine the value of, say, Macy’s Inc. or Target Corp. or fashion manufacturers as a group.

Over the years, this highly chaotic process has become the standard way of establishing how much a business is worth, at least in dollar terms. It remains to be seen if markets are still doing that effectively.

Here’s WWD’s guide to what triggers stock movements, for better or worse.

 

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