The stock market reacted to today’s defeat of the bank bailout bill with an unusually big decline. Yet the news wasn’t much of a surprise to people watching Intrade, whose contract BAILOUT.APPROVE.SEP08 was trading around 20% all morning. Why did the stock market act as if it was a big surprise?
Did Intrade traders make a lucky guess not based on adequate evidence? Did they have evidence that the stock market ignored? Could the stock market have priced in an 80% chance of the bill being defeated (if so, that would seem to imply that passage would have caused the biggest one-day rise in history)? Could the stock market have been reacting to other news which just happened to coincide with the House vote? (It looks like the market had a short-lived jump coinciding with news that House leaders hoped to twist enough arms to reverse the vote, but I wasn’t able to watch the timing carefully because I was at the dentist).
It seems like one of these must be true, but each once seems improbable.
I covered a few of my S&P 500 futures short positions at near the end of trading, but I’m still positioned quite cautiously (I made a small profit today).