Market players started off with a bang this morning on good economic news out of China and optimism about the election and the Fed later this week, but worries about a possible sell-the-news reaction set in and caused some profit-taking. There has been so much discussion about a possible sell-the-news reaction that nervous market players were anxious to jump in front of it rather than wait for it to actually occur.
When events are well anticipated, market players will usually accelerate the reaction. It will be completely unsurprising to most everyone if the Republicans do well in the election and the Fed announces further quantitative easing. It is too perfect of a setup for a sell-the-news reaction, and that is exactly why we are seeing it happen to some extent today. If we sell off into the news, it will completely change the dynamic for what will occur on Wednesday.
The selling felt worse than the modest losses in the indices, but that was due to the gap up to start the day. The action still isn't that bad at all, but I'm hearing a lot of predictions that we are forming a top. Maybe we are, but I don't think it is going to be that simple. I'm looking for at least another stab or two to the upside before buyers will manage a better pullback. It is just too neat and clean for the news events to be the exact turning points. If there really is some big surprise like no quantitative easing by the Fed or a good showing by Democrats, then that will change things, but if the news is roughly as expected, I expect substantial volatility rather than a straight down sell-the-news reaction.
We have another day of waiting tomorrow, but there is going to be lots of jostling for position in front of Wednesday's news. No one can be very certain how things will play out.