Reacting to Events: A Lesson from the Master

by: Jeff Miller

In Thursday's article I covered one of the biggest challenges in trading and investing: How to react when there is dramatic news. We took the Bhutto assassination as an important example.

While we (atypically) missed Art Cashin's observations on CNBC, our analysis drew heavily from watching him and reading his work for twenty years. Take a look at Thursday's article and then come back to compare it with Cashin's Comments below.

A Lesson from the Master

Art Cashin of UBS Financial Services writes an excellent daily commentary. It combines a bit of history, a touch of whimsy, a few brain teasers, and the real scoop on what people on the NYSE floor are thinking. If you want to know how the market will react to news, to a certain technical level, or to a surprise, understanding the Cashin perspective is crucial. The following is Art's own account of events:

Reacting To News: Ye Olde Trader's Handbook

As the story of the Bhutto assassination hit the newswires shortly before 9:00 a.m., I was asked to fill in for a friend on CNBC. The Squawkbox crew of Joe Kernan and Becky Quick along with Brian Shactman, sitting in for Carl Quintanilla, peppered me with questions about what a veteran trader would do when hearing news like that. I responded that you would pull back and hunker down. In essence you would cancel your orders, particularly your buy orders, lest you get picked off should the bad news suddenly turn horrid.

That, judging by the subsequent action, was apparently what lots of folks did. Stocks moved lower in light volume. That's not a sign that they are throwing stocks out the window. It is a sign that the sellers have to dig lower to find the bids that are still there. The low volume and falling prices suggest that search was not easy.

Let's look at the news to see why the best plan is to cancel your bids. Here's how a trader quickly reasons. Bhutto is murdered in the second public attempt on her life in months. Pakistan is critical both in geographical and political senses. Also, Pakistan has an arsenal of nuclear weapons, the location of which is not specifically known to U.S. defense or intelligence sources. There is a Taliban-like resistance in the hinterlands which has attacked and occasionally defeated Pakistani government forces. These Taliban wannabees may be aiding and harboring Osama Bin Laden. The assassination probably weakens Musharraf whose hold on power is tenuous at present. That's quite a recipe for potential chaos.

But, after you've instantly run through this checklist, you pause. The only fact you have so far is that Bhutto has been murdered. You don't know of mass rioting in the streets, insurgent mob attacks or military defections. So, you have news that you know is not good but you cannot gauge the fallout. Maybe, unlikely as it seems now, the election in Pakistan will go on and issues will be resolved democratically. So, you don't hit the 'sell everything' button. You cancel your buy orders and await further details.


Art concluded that the decline was 80% Bhutto and 20% banking and financial news. As we did, he used the timing of moves in futures trading to gauge the impact.

Surprises like this one are inevitable. Art Cashin's advice is practical for one's immediate reaction and helpful