Friggin Sell the News: How Does it Work?

by CC September 22, 2011 12:38 pm • Commentary

We’ve talked a little about how technically and correlated the markets have been trading lately. I wanted to point out another trend, which is the sharp selloffs we’re seeing after what look like will be positive news events. I think what is happening here is the market nudges up against previous highs in trading ranges going into something like yesterday’s Operation Twist. The action since has been eerily similar to what we saw when the debt ceiling impasse was resolved. My take is that market participants are afraid of short squeezes like we saw with the first Greek bailout at the beginning of the Summer. In the two big instances since, the market has rallied into an expected event, then sold off hard once the news was confirmed.

Most people are focusing in on the Fed’s statement with the words “significant downside risk” and I do think that’s important. But my hunch is that people were afraid of an upside surprise, a massive QE3 for instance, and once that didn’t happen, they went right back to selling stocks, repositioning shorts, dumping things that had had runups and basically puking risk.

This will be something to keep in mind during the next news cycle that is so telegraphed. It’s conceivable that it could work the other way too. If a Greek default becomes obvious, and the market pukes into it, making revulsion type lows (much lower than here) you could see a reversal off the bottom when the news actually hit. (Assuming no Armageddon type contagion from that default, contagion is a whole other story)