Tuesday’s stock market action was bizarre.  As indicated by the futures market, the Dow opened very strongly.  At one point, it was up 441 points.  Around 2PM, it started sinking – faster and faster.  At closing, it was dropping like a rock and closed down 205 points. — a 646 point in one trading day — simply bizarre!

This begs the question:  what breaking news turned all those bulls into bears?

I have a suspicion that it had to do with the retail investors.  They wisely utilize mutual funds as their investment vehicles.  While stocks are bought and sold during the day, mutual funds are bought and sold only at the 4PM closing.  Whenever there is an imbalance between buy and sell orders, the closing can be chaotic.   Obviously, sell orders were much larger yesterday than buy orders, sinking the market.  Monday night, after the Dow fell 588 points, I suspect retail investors looked at the 401(k) balances, couldn’t take the pain, and entered sell orders.  As the sell orders were building up during the day, traders knew they should get out of the way and started selling about 2PM.

The answer to the begged question is:  no breaking news, just the build-up in sell orders.

This may be a good omen!  An old Wall Street adage is that bulls don’t run until “capitulation,” which is that time when investors can’t take the pain and uncertainty any longer and sell out at any cost.

Was Tuesday the capitulation we have been waiting for?  The futures market indicates a very strong opening on Wednesday.