Doesn't Take Much for a 500 Point Rally in an Oversold Market

Friday is a perfect example of why I do not recommend that long term investors, regardless of how afraid they are right now, sell their stocks into oversold equity markets to minimize short term pain. When sentiment is so negative, the mere nomination of a new Treasury Secretary can result in a 500 point Dow rally within hours.

All of this announcement did was lift some uncertainty from the market, but traders hate uncertainty. Does it matter that Geithner was one of the two or three people most talked about for this job? Not at all. All that matters is that now we know who it will be.

Now, does this mean we won't be down 500 points on Monday? Of course not. The point is, when markets are down so much and have priced in so much negative information, it does not take much to get a massive rally. Imagine what would happen if economic data begins to improve sometime next year?

Unless you are psychic it is very difficult to get out of the market and get back in time to catch most of the rebound. With electronic trading and instant dissemination of information these days, the market can move a couple thousand points in a matter of days (which nowadays is a 20-30% move). The odds are against you being able to get back in fast enough, which is why I don't even try.

Comments

[igggy:]

Not convincing. A sharp rebound is usually nothing else but short covering. Then, the longs unload and the market gradually drops down to where it was. A prolonged rally takes longer to develop from what I've seen. No examples in this article if that's not the case.

2008 Nov 23 02:14 PM

[the_feds_co...:]

Your logic is incorrect. The dow futures were up almost 300 points in the early am 1-2 a.m. C.S.T
The market was up in HK as well.
Your assertion that the news of a treasury appointment created a cascade of 500 points is ridiculous to the point of sublime.
If useless information like this is the best you can produce please find another trade or profession!

2008 Nov 23 03:57 PM

[jepittman:]

Actually I find some logic in this piece.The author is suggesting that long term investors not attempt to 'time' the market due to the volatility factor. His assertion that the volatility was caused by the naming of the new Treasury Secretary is a minor point. The main point is that volatility is so abnormally high that it likely will not be advantageous for those with longer investment horizons to become traders. Sounds like good advice to me.

2008 Nov 23 04:16 PM

[willynill:]

At about 3:00 p.m. EST, the Dow was at approximately 7500, and that's when the market learned who the new Secretary of the Treasury would be. One hour later, the market closed at 8046, up almost 550 points. That's not a cascade (rapid downward movement), it's a significant jump upwards. In the absence of other news during that time, we have to conclude that the jump was almost entirely due to the new information. Remember that the stock market is a leading indicator, not a lagging indicator (or even concurrent), and that it reacts quickly to new information about the future. If we suggest that the recent market drop is Bush's fault, we are wrong. The Bush administration is the past; the Obama administration is the future. The stock market "discounts" the future. So this stock market movement since election day is about the Obama administration and its influence on the economy; it is not about the past.

2008 Nov 23 06:26 PM