Tuesday, February 10, 2009

What happened to the stock market on Tuesday?

Gee, with the Senate passing its stimulus bill and Treasury announcing a grand new revamped bank bailout plan, you would think that the stock market would have been primed for a monster rally, but instead we got a dramatic decline. What happened? Put simply, this was most likely an example of the old trading pattern of "Buy the rumor and sell the news." In other words, the market rose recently in anticipation of the vote and announcement, and then traders and short-term speculators decided to take their profits and bet that many others were going to do the same thing. It happens all of the time, or rather much of the time.

Another factor is that until all of these dramatic government efforts actually make real and visible traction in the real economy (or at least a sizeable consensus develops around that view) the stock market will be stuck in a trading range, swinging up and down repeatedly without setting any new high or low. The recent gains brought stocks up near an area of "technical resistance." Since there was no dramatic level of new money flowing into the market to push stocks dramatically up above that resistance level, the traditional inclination of traders and short-term speculators was to close out bullish bets and open up bearish bets, at least for the near-term. It happens all of the time, or rather much of the time.

In summary, the factors coming together today were:

  1. Range trading.
  2. Technical resistance.
  3. "Bought the rumor, so now sell the news."

So, feel free to ignore the market and go about your life as if the market (or at least its crazy volatility) did not exist.

-- Jack Krupansky

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