This never occurred to me during yesterday’s sell-off, but what we experienced was in fact very similar to the inverse of what you see at a major market bottom. Very often at market bottoms the market will reverse course on bad news as the sellers climax and the buyers are all that’s left. The news continues to come out fairly negative, but there are no sellers left. The buyers stampede and a new bottom is formed. What we saw yesterday was potentially the opposite. David Rosenberg elaborates:
For the first time in this 60% bull run (I still call it a bear market rally), we saw the market sell off on what could only have been described as unabashed good news from the overall tone of the FOMC press statement.
The high for the day on the Dow Jones Industrial was 9,916 at around 2:30 pm — about fifteen minutes after the FOMC release. At the end of the day, the Dow closed at 9,748. That’s a swing of 168 points.
At the March lows, we had a huge reversal too, but in the other direction. I’m obviously not a technical analyst, but we should think about what this could possibly mean (if it means anything at all). It could imply that the market has run out of buying power. Or it could mean that the market has already overpaid for the ‘sweet spot’. It could also mean that the psychology of “buying the dips” is over, and a “locking in the gains” mentality may be setting in.
All I know is that this is the first time in this six-month rally that we have seen a reversal to the downside on a positive news day.
Excellent thoughts. Thanks David.
Source: Gluskin Sheff
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.