During the very early stages of this advance off the then lows we would watch how the markets reacted to negative news flow. We did this to gauge whether all the bad news was already discounted in prices. Like many other lows in the past when bad news was widespread, this tape also had its share of scary headline news. And similar to other previous lows this market also ignored the bad news every time it came out and managed to work higher.
Since markets are a discounting mechanism they try to look ahead. Hence a few months back the markets were probably anticipating the not-so-bad economic data we are now seeing. Thus Friday’s bullish non-farm payrolls actually led to a sell-off after the initial euphoria faded. This selling on good news was most likely due to the fact that the news had been anticipated. Now one day of selling into a rally on bullish news does not make for a raging sell signal; however, it should at the very least make one start watching more closely to see whether bullish news in the coming days and weeks will lead to more of the same activity(i.e. selling the good news) that we saw on Friday.
At some point we are likely to get a testing sequence and selling the good news could be an early signal to take some chips off the table after a near 50% run off the lows.
Source: Kevin Lane, Fusion IQ, June 8, 2009.