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Cashin's Comments On Bailout Bill

We always listen to Art Cashin when he speaks about how the stock market might handle a given news event. His many years on the floor of the New York Stock Exchange have given him an invaluable level of insight.

This morning, he wrote up a note on what the reaction could be to the House of Representatives vote on the bailout bill later today. After Monday's 777-point Dow dive on the last House vote, it's best to go into this day prepared for anything.

I also include his comments about a mood swing we saw among traders yesterday, not just in the stock market but in the Chicago pits, the energy market and on bond desks. In a kind of group think, traders suddenly became worried that the bail out may not work or be too late.

Cashin is the director of floor operations for UBS at the NYSE. Here are his thoughts:

The Worst Possible Scenario – When news breaks, traders don't have a chance to convene a symposium to evaluate the potential impact of the news.

Because of that, the role of the trader is to look ahead and construct various scenarios outlining "what might happen if…." Yesterday, there was a lot of scenario building around the presumed vote on the rescue package in the House today.

The first step in building those scenarios is to assess the three possible outcomes on the vote. They are: pass, fail or postpone.

The postponement outcome would likely bring nervous, possibly aggressive selling going into the weekend. This presumes that the market would worry that valuable time was being squandered and that the postponement suggested non-support. If the bill were to pass, the general presumption is for a rally. There is a great deal of debate as to how strong and effective such a rally might be. Then there's the risk that the bill gets voted down again. That could produce another vicious selloff. Traders see a negative vote as unlikely, unless the leadership completely blows it.

Would the negative vote and following vicious selloff be the worst scenario? Traders have another thought. Suppose the bill passes easily and a rally quickly erupts in the stock market. What if that rally were to roll over and then turn negative? That, traders fear, would be the worst scenario. Will it happen? Who knows. But as Pasteur said – "Chance favors the prepared mind."

Moody Blues – One of the other disquieting aspects of the Thursday trading... was a kind of fatalism that floated in. For the first time I heard people wonder aloud whether the "package" might be just "too late". Watching various sectors and markets almost disintegrate around them, some traders worried that a "process" may have already started. Based upon reports that Bernanke had seen crisis and large failures "within days" over two weeks ago, some folks worried that the journey may have begun. Let's hope that's just misplaced negativism.

    • House to Take Another Crack at Bailout
    • Trichet Backs Paulson's Bailout Plan

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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