Monday, August 08, 2011

Turmoil continues to roll across the globe

The sell-off has continued overnight with the Nikkei down 4%+ and the Hang Seng down nearly 8% already. The US futures look pretty bleak right now but in markets like these 11 hours (when the US opens) is an eternity.

If the markets were to open at these levels though it would not be pretty because we would be around 1095 for the S&P 500 which is solidly below the last major floor that the ruler users (ie, chart readers and computer traders) have as their line in the sand - roughly 1120.

The next stops for the S&P 500 would be around 1020-1040 or another 4-5% in rapid fashion. My thinking is that the markets may be very volatile tomorrow as the global sell-off gains steam but some are hinting that they expect the Fed to announce some form of further easing. Again, while the S&P downgrade and the shenanigans in Washington contributed to this decline I think the roots of this drop can be traced to the ending of the Fed's QE2. Without the Fed in the market to offer up free money to the banks the markets have become a one way street back to 2008. As I've said repeatedly since 2008 the banks and Wall Street in general, have become so accustomed to Fed easing that they can't function without more easing. Any easing will just delay the inevitable, but if it is sized properly it could lead to vicious rally in stocks.

The difficulty in markets like these is that there is no protection in diversification. Every one of the stocks in the S&P500 was down today. That sort of correlation makes it hard to keep your head above water.

Also note that the S&P was at 1,113 on June 5th, 1998. We'll probably break that tomorrow which means that despite all of the rah-rah Wall Street cheerleading and talk of 10% annual returns over the "long-run", the reality is that 13 years after that date we've gone nowhere.

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Strangest Headline of the Day in a day of strange headlines: "The BBC using words like 'No Go Zone' to describe parts of London."

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