Volatility Is the Only Constant

Embodying some of the day's confusion over what is liquidation selling and what is based on fundamentals was the sell-the-news reaction to a relatively strong earnings report out of MasterCard(MA Quote). The stock dropped more than 10% in early morning trading, and ended the day down 6.7% despite its strong quarter.

"Hedge fund liquidations would contribute to part of the declines in the stock market," says Justin Walters, co-founder of Bespoke Investment Group, when asked about outsized drops like MasterCard's or Apple's (AAPL Quote) prior to today's rebound. He had no specific knowledge of why MasterCard in particular dropped like a stone.

The sell-the-news phenomenon isn't new, says Walters. According to his research, the one-day price change of companies following their earnings report thus far this quarter reveals that "earnings beats" have not been rewarded. The companies that have been rewarded are typically smaller, with lower weightings in the S&P 500; Wednesday's examples include Devon Energy (DVP Quote) and OfficeMax (OMX Quote).

"Sometimes you sell what you can and not what you should," says a hedge fund manager, speaking on the condition of anonymity.

Walters believes this is where the market may highlight some opportunities. "Stocks that are down, but reported great earnings with positive guidance ... those are the opportunity," he says.

Earnings thus far are weaker than in the first quarter, putting in 6.5% growth year over year with 366 companies in the S&P 500 reported, according to Thomson Financial. So far, 66% of companies have beat estimates, which is mostly on par with the past eight quarters in which an average of 68% of companies beat expectations. Thomson predicts earnings growth for the quarter winds up at 7%, down from 8% in the first quarter.