12:55 Floor Talk: Sell the news
What we're seeing this morning is a classic "sell the news" reaction to the release of the Stress Test results. Now, the official results won't be released until this afternoon, but as we stated yesterday the federal government has done a very good job of leaking the details to the press ahead of tonight's official release, which has allowed market participants to already price in what turned out to be much better than expected capital raise requirements. So it wasn't surprising that, since the banks and insurers have already squeezed higher over the past week as these details were leaked, these names quickly gave up their gap up this morning since there is very little uncertainty left as to what the official results will be tonight.
Yesterday we suggested that one of the signs that traders should watch for as a clue that the market's rally was losing steam was a shift in sentiment where instead of rallying on both good news and bad, we actually sold off in the face of good news. (The market is forward-looking, so after a long run when it starts to sell off on positive news, this implies that expectations for further good news in the coming days and weeks have already been largely priced in.) We mention this because this morning's aggressive gap up reversal following yesterday afternoon's leak of the better than expected Stress Test results fits this description. In addition, it's worth noting that today marks the last heavy day of earnings releases for what was undeniably a much better than expected Q1 earnings season, so the end of this week marks the winding-down of two of the three news-driven catalysts that have fueled positive sentiment in the market (the third one has been positive economic data). The sell-off in CSCO following its stronger than expected report and guidance is clear evidence that at least for the near-term, these beats have been largely priced in. The next key test of sentiment comes tomorrow, as the market's reaction to tomorrow morning's April Jobs Report data will be very telling as to where sentiment lies.
Now, it bears emphasizing that the aggressive sell-offs we've seen in the leading names (Financials, Tech, Retail) over the past two sessions on the eve of the Stress Test results and the end of earnings season are merely clues that the market could be due for a pause. The bulls are in control until proven otherwise, and the shorts seem to be incapable of stepping aside for even one day. So in short, the past two sessions inject a note of caution into what was otherwise a one-way market, but these clues are by no means the definitive signs of a top that many have been predicting.
Horsehead and Orion Nebulae
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