BLACK CLOUDS AND TRAUMATIC MEMORIES
When I posted an article a couple nights ago entitled "The Ben Bernanke Kicks Off A Period of Chop", I stated the following:
We’re in for some short-term (3-5 days) choppiness, with a slant to the downside
I didn't think that "slant" would involve 700 points on the Dow and substantial weakness in several key sectors.
There have obviously been some significant events over the past couple of days. Let's review the key points:
1. Transports have broken down for the time being.
2. Financials have broken down convincingly.
3. Key bank stocks (C, BAC, MS, GS) look like they are in death spiral mode.
4. Copper (a leading indicator of the global economy) has been destroyed.
5. The CRB (commodities) have broken down completely.
6. The Fed has been proven ineffective, with Operation Twist being hailed as a nonsensical strategy deployed so that the markets wouldn't crater completely thinking the Fed has abandoned investors.
Six significantly ugly events just this week. If you would have showed me the chart for Copper, Morgan Stanley, Goldman Sachs, Citi, the CRB, TLT, and the Dow Transports without showing me where the S&P 500 was I would guess that we would be sitting at 1050. No way I would guess that we would still be sitting in the bottom end of the nearly 2 month trading range. The fact that we are is what I consider to be a positive divergence going forward.
The psychological ramifications of the economic Armageddon that was 2008 and early 2009 are reverberating through the current market environment. There is a 2008-2009 repeat scenario premium that I believe is being factored into everything from stock prices to fixed income pricing and going as deep as spreads on various CDS contracts.
Out of the sea of disinformation then, we only need to be paying attention to two important factors. Forget the headlines. Forget what Roubini says. Forget what your favorite hedge fund manager on CNBC says. Forget it all. These are the only two pertinent points:
1. The S&P has held onto its lows despite six separate but equally destructive events taking place.
2. Given the relatively short amount of time between the last financial crisis and this current crisis, there absolutely is a repeat scenario fear premium being factored into the various asset classes.
And then there is the pure fear I am seeing in various investor fear gauges. For example, some of the proprietary put/call data I keep an eye on is at all-time record highs. Higher than anytime in 2008 or 2009.
For these reasons, the window to buy is once again open. And with the way this market has been behaving, it may close quickly.
