Panic Sell Off!

Investors in the US market hit the panic button today as the Dow sold off over 380 points in a single day on the passing of the stimulus package. This is a classic panic sell-off made up of a large percentage downwards move in a single day, large volume surge, all of the Dow components going down, along with a drop in bond yield across the board as investors rush for quality (see bond yield curve), all on a not too strong reason... the stimulus package.

It is weird to think that investors look upon the stimulus package as some sort of terrorist attack which warrants a sell-off of over 300 points. All economic crisis must end with stimulus packages that sound like they can damage the economy some time down the road but this is nonetheless a necessary part of all recoveries. To think of this sell-off on the stimulus package as an indication of investor sentiment and that from here onwards, the market is going to go down and down just because the government wanted to help is absurd.

So, what does classic panic sell-offs like this one do? Well, they serve to lure investors into the short by the end of the day just to be taken out the next day. Almost all classical panic sell-offs end with an up day the next day as investors take advantage of the suddenly low price over not too strong reason. Especially with the Dow now at the support level of its short term neutral channel once again, it seem much more possible that the bulls are going to take back some ground tomorrow. In fact, the futures are already pointing up and stocks that have been beaten down has rallied in after market trading. The short term and intermediate term neutral trend stands... for now.