Trading Tips

When the market rallies that fast, beware

Yesterday was a classic stock bear market rally of the sort which happens when the market reaches extreme sentiment situations. Obviously, things had gotten extremely negative. The VIX crossing the 30 line was a major warning signal. The good news is that it tends to mean that some of the tone has moderated and things are likely to be a bit more rational in the near term. The bad news is that once the reverse froth has come out and traders realize that all these financials beating expectations doesn’t actually mean they are doing well, there’s a very real risk that things turn lower again.

Barry Ritholtz wrote a very good piece on his blog on why these sorts of things happen – what he calls the psychology of selling. Definitely worth a quick read.

By John

Author of The Essentials of Trading