Home > Economics, Finance, Trading > Rough Day in the Markets

Rough Day in the Markets

Just about everything got sold off today…you name a sector and it was red…that is, aside for two recent headline grabbers: Goldman Sachs and British Petroleum.  In some respects, it makes perfect sense that these two would hold up rather well today as they had an earlier start and suffered from particularly aggressive selling in recent days; however, there is something strange about seeing relative strength with these two while traders and investors alike are shifting to the risk aversion trade today.  These two stocks old off because their fundamental risk structure changed dramatically due to event-driven catalysts.  Whether the catalyst for the market’s drop was rumors of Spain requesting a bailout (rumors which Spain denies btw), continued fears about a Greece default, or maybe even the economic damage inflicted by the gulf oil spill, one thing was particularly clear–the flight to safety is on.

In the thirty minutes preceding today’s open, U.S. Treasuries rallied sharply, surpassing multi-month resistance levels.  This should help quiet some of those who claim that the U.S. is at risk of default.  Markets keep proving just how absurd some of the deficit rhetoric is.  Europe is a unique problem with its own complexities and at the end of the day this is all just a question of relativity anyway.  Earnings continue to recover at a faster rate than expected and this should help close the gap created by the rapid drop-off in U.S. tax receipts during the crisis.

In the near-term, I would expect to see some more broad-based selling.  A move like this is rather difficult to quickly shrug off; however, I will be looking for strategic levels to buy strong companies with solid balance sheets.  One of my themes is that we are in a rolling credit crisis.  As such, there will be times in which credit markets could become tumultuous in various subsets of the economy.   Companies with little short-term debt have a much better position to weather any short-term market turmoil (look no farther than Apple with its $20+billion of cash).  Commodities and commodity-based stocks become particularly volatile and weak amidst deflationary concerns.  Some commodities and derivative stocks which had been oversold of late, led the market lower in the early going (take a look at Cleveland Cliffs and U.S. Steel).  One would think that given the extent of the Gulf oil spill, and the potential short-term supply shock that would result from an offshore drilling moratorium, traders would use the news as a catalyst to further ramp up oil prices.

Turns out the global deflation story remains the key driving force these days.  In the U.S., we had our 2007-08 crisis and in 2010 it is now Europe’s turn.  I’ll be watching U.S. Treasuries (via the TLT) closely over the next few days to look for signs of a more serious move towards risk aversion.  Today’s move is of a large enough magnitude to warrant close attention and heightened concern in the short-term.

Just a little market rambling after one of those days in the markets…the signs were there…I saw them…I did not respond to them.  Sometimes days like today are just the cost of acquiring invaluable information about what’s really going on in the quest to generate alpha amidst the short-term fluctuations of asset prices.

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Categories: Economics, Finance, Trading

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