The S&P 500 has gained 101% from the low set back in March of 2009 (666.79). Even with yesterday's market plunge, the S&P is only 15% lower than its all time high of 1,576.09, which was set back in October of 2007. The question is why. Has the economy really improved that much since the economic crisis to warrant this rise, or is something else driving the market higher? Here are some of the current economic conditions: 1) Housing prices in the United States continue to freefall. Tuesday, the National Association of Realtors reported that the median price for single-family homes fell nearly 7% from the fourth quarter of 2010 to $158,700 – 4.6% lower for the same period last year. The more home prices fall, the greater the number of borrowers who become underwater on their mortgages. This leads to an increase in the number of foreclosures and a continuance of the negative housing cycle. 2) The unemployment rate has rebounded a paltry 1.1% from its low of 10.1% set back in October of 2009, currently sitting at 9%. That 1.1% improvement is hardly in line with the 32% rise in the S&P over the same timeframe. 3) Commodity prices over the past year have been soaring. Oil prices have increased 31%. Gasoline prices have increased 45%. Silver prices have increased 91%. Gold prices have increased 25%. Food prices have been surging across the board, with corn futures recently hitting all time highs. Gold and silver, which are historically gauges of fear and inflation concerns, have been rising right along with the indices – an extremely odd occurrence. So how is it that an economy in such seemingly bad shape can have a strong market relative to historical comparisons? The answer may lie in the rise of algorithmic trading. Unless you have been living under a rock, you know that since the late 90's, algorithmic trading has been steadily gaining prominence in the financial industry. High frequency trading (HFT) currently accounts for about 70% of all U.S. trading volume. Computers, in essence, drive market direction. Investment banks and trading firms simply plug in formulas and computers execute trades based on certain parameters and conditions. In speaking with numerous high frequency trading firms and traders in Chicago, the consensus seemed to be that the “trade of choice” since the market collapse has been based on the action in the commodities and currencies markets. When the market crashed, commodities crashed along with it, which was a nod to the slowing of the U.S. economy. HFT firms and investment banks basically came up with the straightforward theory that a rise in commodity prices would signal an improvement in the economy. So, the algorithmic trade was set (If X, then Y). The formula and reasoning looks something like this: Higher commodities prices = growth = strong market. Weaker Dollar = Higher commodities prices. Algorithm = When dollar falls, buy commodities. When commodities rise, buy market indexes. To illustrate this, just compare one year daily charts of the EUR/USD, S&P 500 (

), oil futures (/QM), silver futures (/SI), and gold futures (/GC). All of the charts look nearly identical. If you use ETF's, compare PowerShares DB US Dollar Index Bullish (NYSE:

), SPDR S&P 500 (NYSE:

), United States Oil Fund (NYSE:

), iShares Silver Trust (NYSE:

), and SPDR Gold Trust (NYSE:

from Zero Hedge. Although, U.S. regulators and politicians have made sharp public criticisms of the practice, little has been done to put it to an end. Time will tell how the algorithmic trading phenomena will play out, but if recent events are any indication, it will not be pretty. Till next crash……