Why the big stock sell-off in the face of great news on the bailout front?

Traders and speculators love market volatility and are all too eager to push the market as hard and far and fast as they can in whichever direction seems to have the least resistance. Although the progress on the bailout front is nothing short of spectacular, the unfortunate fact is that a lot of retail investors are hurt and angry and confused and anxious and have been pulling money from their mutual funds. This provides an underlying downwards pressure on the market upon which traders and speculators are layering their bets. Although short-selling is restricted on some stocks, primarily those with a significant finance component, it is not restricted in general or on ETFs, so there is probably a significant degree of short-selling going on which exaggerates any underlying market movement.

Another new factor exerting downwards pressure on the market is that so-called "Long/Short" hedge funds which make a combination of long and short stock bets have been dumping long positions since they are unable to make as many interesting short bets in an environment in which shorting is restricted. Or, they shift to stocks that were not formerly under as much pressure.

Not all hedge funds short stock, and there have been significant redemption pressure on hedge funds, so liquidating their positions frequently means dumping stocks.

Also, we are at the end of the month and the end of the quarter, so there is a fair amount of window dressing and position-squaring.

According to AMG Data Services, for the week ended last Wednesday, "Excluding ETF activity, Equity funds report net cash outflows totaling -$9.318 billion, the largest net outflow since 1/23/08; with Domestic funds reporting net outflows of -$5.277 billion and Non-domestic funds reporting net outflows totaling -$4.040 billion." Money flows for mutual funds do not always immediately translate into money flows for the stock market. Sometimes there can be a lag of several days or a week or more as the mutual funds manage their cash positions and try to avoid actually dumping stock at a time of market stress.

Eventually retail investors will come around, but given that this is an election year and the media loves to exploit even a hint of negativity, it is difficult to blame mere retail investors if they feel more than a little gun-shy about the stock market these days.

Me... I am not selling anything. Actually, I am selling part of one money market fund so that I can put the money in a higher-yield bank money market account. But my stocks I am hanging on to. And most of my cash will remain in money market funds at Fidelity.

-- Jack Krupansky