Yesterday, I had lunch with my long-time mentor, so I missed the last hour of market action. We discussed the market in great detail, and we found ourselves in close agreement. When I got back to the news later in the day, and when I watched the European and Asian markets last night, my thoughts changed dramatically. I then sent my late-night thinking to my mentor.
Today, I expected a drop in the range of 250-350. That would be the capitulation we discussed. A 500-point drop is excessive panic. As well, tonight I am watching the action in the European and Asian markets, and they are getting crushed. Sentiment clearly points to further panic in these markets. Italian bond spreads reached scary high levels today and Spain just postponed its bond auction until September. Trichet gave no indication today that the ECB will step in as the buyer of last resort for Italy or Spain. Instead of announcing the ECB would backstop Italy or Spain, Trichet announced that the ECB’s renewed bond-buying program (QE) would focus on Ireland and Greece. On top of this, financial contagion is now the perception in place. This reminds me of the inability of Paulson and crew to step in forcefully to save Lehman back in 2008. It took serious market damage to get the political motivation to move.
Another item I was not aware of in our earlier conversation is the 35% jump in the VIX. This is reminiscent of 2008. No, I don’t see the collapse we saw in 2008, but I do see panic on the street that will bring the DIJA down considerably in the near term, perhaps nearing 10,000. Of greater importance is the S&P dropping under 1200. This is a critical technical level. On top of all this, global markets are moving on significant downside volume, and I expect that will flow into the U.S. market tomorrow (today).
As I said, I believe all these problems will work out eventually. In the near term, however, fear about the all of the above and fear about the deficit deal will replace rationality. Add to this fear comments today from leading Republicans that any Republican placed on the “super” commission will absolutely not agree to tax reformation or revenue increases and the statement that the “hostage” approach is the blueprint for all future fiscal discussions. This irresponsible rhetoric spooks the market. It looks like these folks will not back down, despite the market effect. So, when Congress returns in September, expect more of what we just went through right through the fall. Witness the FAA debacle, which today Congress postponed until September.
Finally, aside from the “circuit breakers” for high frequency trading, nothing much has been done to control this hazard. The analysts I watched tonight attributed some of the late U.S. market decline today, and the beating the European and Asian markets are taking, to high-frequency traders. If this is true, extreme volatility will cause even more irrational selling, especially if the employment report tomorrow (today) is on the extreme low side.
Today, employment numbers came in above expectations and the market response was “so what?” The ECB announced it will buy Spanish and Italian bonds, and the market roared back. More up and down, but at least we now know the true focus of the market …
Trade in the day – Invest in your life …
