MARKET SNAPSHOT: Did Investors Simply Sell The News Of Bank Bailout?

A debate raged among market analysts Wednesday about whether the prior day's sell-off was based on sheer disappointment with the U.S. Treasury Dept.'s bank rescue plan, or was a simple "sell the news" event.

On Tuesday, the Dow Jones Industrial Average (DJI) slumped more than 380 points, or nearly 5%, marking the blue-chip average's worst drop in more than two months.

The sell-off came after Treasury Secretary Timothy Geithner unveiled the latest attempt by the government to rescue banks and the financial system.

"The response from Wall Street in response to [...] Geithner's non-plan plan was a resounding 'No,'" said Dan Greenhaus, market strategist at Miller Tabak, in a note.

Many analysts and media reports explained the market reaction as disappointment that the plan was short on details, specifically, on how the government would deal with the toxic assets that have plagued banks' balance sheets and the financial system for more than a year and a half.

"Nonsense," said market veteran Barry Ritholtz, CEO and director of equity research at Fusion IQ.

"If you look at the run-up in the market prior to the announcement, for three days there was already a big boom in all these [financial] stocks," he said. " The second [Geithner] started to speak, the market just fell apart, a classic 'sell-the-news' type of reaction."

On Wednesday, stocks first seemed to regain some footing. But the Dow industrials recently fell 10 points to 7,878, the S&P 500 index (SPX) was down 2 points, or 0.3%, at 825, and the Nasdaq Composite (RIXF) was down 10 points, or 0.7%, at 1,514.

The financial sector of the S&P 500, which slumped 12% on Tuesday, still rebounded, gaining 1.5%. Shares of Bank of America (BAC) gained more than 7%, J.P. Morgan Chase (JPM) was up 3% and Citigroup (C) rose 5%.

"People are looking at yesterday, [and thinking] they overreacted too much," said Todd Leone, managing director at Cowen & Company, I think people expected too much." Listen to Leone.

All in the mind

While the truth about the market's reaction probably lies, as usual, somewhere in the middle, the mix could be quite revealing about the state of mind of investors and the short-term direction for stocks.

Have investors priced in most of the bad news out there and are ready to move forward on any positive sign? Or will lingering uncertainty about government fixes keep the market vulnerable to what most expect to be consistently bad economic news for the foreseeable future?

Over the past few weeks, investors have been buying stocks on the back of dismal economic news, including the January employment report, which showed the biggest monthly loss of jobs since 1974.

Analysts have interpreted this trend to mean that the market has already largely discounted a terrible outlook for the economy and earnings this year.

But just how much worse things could get remains an open question, and many analysts and investors have turned to the government's plans for banks and the economy to provide the answer.

Maybe the market sold the news on Wednesday, said Michael Farr, market analyst at Farr, Miller, and Washington. But "Geithner's speech raised more questions than answers," he wrote in a note.

And one thing markets hate is uncertainty.