Waterfall Decline

The answer to the $trillion question turned out to be a), the 'elevator shaft' scenario. US markets gapped lower by over 2% and, save for a few rally attempts here and there, basically sank throughout the day.

In the last 30 minutes, margin calls intensified the selling, sending the Dow to a -600 point day. The SPX was off almost 80 handles.

Last Friday I put back on a small SPX short position which I let fly into the morass this afternoon. Stocks are going down very easily here.

Indeed, downside bets may be getting too easy. What we've witnessed in the past week is a 'waterfall decline' which is self-explanatory by the image above. And contrary to the waterfall imagery, markets rarely move in a straight line without relieving some pressure.

About two weeks ago the SPX was tickling 1350 and appeared to be tracing out a reverse head and shoulders pattern (bullish). The SPX has shed about 17% since then, which qualifies as a multi-day crash.

While I sense that, ultimately, the indexes have more work to do on the downside, I'm warming to the risk/reward of a long side trade. Technically, the SPX has some support right around here. Moreover, trend exhaustion indicators are suggesting high probability of a near term 'trend reversal' in all major indexes. And bullish percent indicators now show levels that favor upside rather than downside.

As such, I did some buying in big cap tech this pm.

A wild card over the next day or two is the FOMC meeting. Cratering markets are exerting big time pressure on the Fed Heads for another round of QE. Past Fed interventions have invited huge amounts of risk taking behavior steeped in moral hazard. All this risk is looking once more for a bailout from the Fed.

The money pouring into gold (north of $1700/oz today) is betting that Uncle Ben & Co will do the deed and keep moral hazard in play.

position in select big cap tech, gold 

S&P Downgrades US Credit Rating

After markets closed on Fri, S&P announced that it was downgrading the United States from the top shelf AAA credit rating to AA+.

In its report, S&P based its rationale on the recent turmoil surrounding the debt deal which the agency said reduces clarity on US capacity for reducing spending and controlling debt.

The chatter that I have heard this weekend in the wake of the downgrade has been bearish. e.g, 'expect another 6-10% down in markets over the next couple of weeks.' Indeed, that could occur.

On the other hand, it is possible that some of the decline that we saw last week was market participants pricing in the downgrade. In such case, it shouldn't be surprising that we actually rally now that the news is out.

In any event, all eyes will be watching the action early in the week for more clues.

position in SPX

Fast Market

The intraday moves continue to be eye popping. Deleveraging combined with high frequency trading is the likely culprit.

Currently, this is the consummate 'fast market.' Intraday range on the SPX has been about 50 handles today...

During the earlier lift, unwound much of my long exposure that I bought in the hole yesterday. Still holding some Microsoft (MSFT) and Merck (MRK) that will be held for sale if prices continue to firm.

My sense is that if prices don't squirt higher pretty soon, then very near term oversold conditions may be worked off as a function of time rather than price, and we'll head toward SPX 1125.

Even if we should we rally back up toward SPX 1225, Boo the bear will likely lean against this level pretty hard.

positions in MSFT, MRK, SPX

Ugly Day

Ugliest stock market day in quite a while. The 'wide and loose' price behavior brought back memories of 2008.

Major indexes were down 4-5% with the Dow off 512. After a morning surge below SPX 1225 tripped some sell stops, the S&P regained the 1225 level in late morning at early afternoon, or about a 2.7% loss. Lots of folks, your truly included, were watching to see whether that 1225 level would hold.

It didn't. Once 1225 was decisively breached in the early afternoon, then selling brought out more selling. My sense is that leveraged index players were being carried out on stretchers in droves today, and the action late in the day had the feel of margin calls.

Those margin calls drive forced selling--the good gets sold with the bad. As such correlations among risky assets approach 1.0. Great example of this today.

Significant support now rests below at 1125 and 1025.

I wound up covering my S&P short on the break below 1225 in early afternoon--prematurely as it turned out. However, markets are very oversold in the near term. The SPX is off more than 10% in just a few short sessions. Volatility indexes are going vertical--with the VXO up 45% today! Jason's sentiment gauges are suggesting extreme near term pessimism.

Because I had been battling this chunky short position for quite some time, I decided to book a decent trade, clear my head, and look at the situation with a fresh set of eyes.

The afternoon melt actually found me buying some of my favorite large cap names into the afternoon abyss--for a trade. I think this tape has unresolved issues to the downside. But in the uber near term, I think Snapper (a.k.a. snap back rally) has a decent chance of making a cameo appearance.

If Snapper doesn't show tomorrow (Friday), then people will surely start pondering the 'crash' scenario going into the weekend.

position in select large cap stocks

Big Move in Treasuries

Wow, you don't see moves like this in long bonds every day. Long dated Treasuries are up about 5% in a couple of days.

Suggestive of investors who want to get out of risk in a hurry.

no positions

Debt Deal Rally MIA

After yesterday's 'pop and drop' on the debt deal news, we suggested that those positioned for a post-agreement relief rally were hoping that the best was yet to come.

With the benefit of hindsight, yesterday's gap higher may have been it.

The Senate's passing the debt bill today was immediately sold. The SPX closed on its lows, down about 2.5%, on its largest volume in a month. The SPX has now cut decisively below its 200 day moving average. Support rests below on the '25s': 1225, 1125, 1025.

Outside markets have been on the move as well. Gold screamed $30 higher today after the debt passage news was announced. Long bonds rallied again, with 10 yr yields down about 10% in three days. The Swiss franc has been on fire, hitting new highs for the move almost daily and up about 5% in three days. Nearly all foreign markets are retreating. The German DAX, one of the strongest performers worldwide, is off about 6% from yesterday's intraday high.

Add it all up and you get waning appetite for risky assets amid a macro context built on ever increasing piles of debt.

position in SPX, gold

Gold and the National Debt

Interesting projection of gold alongside US public debt. Should the relationship hold, loading $2.5 trillion more onto the debt pile implies that gold 'works' to $1950.

Gold is marking another new high today. Seems the markets are doing the math...

position in gold, GLD