It is extraordinary how fast investors can lose money in the market on bets gone wrong.
During yesterday's trading CIT Group (CIT) shares moved up by nearly 40 percent, buoyed by an article in The New York Post saying investor John Paulson might put the financial company together with IndyMac, which would have solved many of CIT's financial problems. The stock closed at $2.20.
After the market closed, almost everything changed. A reporter at The Wall Street Journal found out that CIT was in real trouble and that its ownership might be turned over to bondholders. If the deal is not consummated quickly, the firm might have to file for Chapter 11. The paper reports, "If CIT does file, it would be the fifth-largest bankruptcy filing, by assets, in U.S. history." CIT shares dropped to $1 in the after-market.
This chain of events shows the role that rumors, many of them completely untrue, play in the stock market. Despite a number of articles which ran at mid-day saying that Paulson would not help CIT, the stock continued to move up aggressively on huge volume -- and that volume actually accelerated toward the end of the session.
The news about the CIT rescue was probably too good to be true all along, but investors believed that they could make a killing if the news was right. It was a long-shot based on one media source. And a lot of people got burned.
Douglas A. McIntyre is an editor at 24/7 Wall St.