Market Talk

Okay, let’s have a show of hands: who thought Europe’s sovereign-debt crisis was over? Anybody? Bueller? Bueller? Who’s that with your hand up? In the back?

Oh, it’s you, Mr. Market. Mr. Market, tsk tsk.

Today’s sell-off is being pegged in some part on Moody’s downgrade of Spain, which “reignited” fears of that Europe’s sovereign-debt problems are still, well, problematic. You can almost forgive the market for taking its eyes off this particular ball. After all, the Fed’s been buying the drinks since August, and the market is never one to look that gift horse in the mouth.

Then, too, the news this past month or so has been dominated by the Jasmine Revolution spreading across North Africa, and there’s been a recovery here in the U.S., the sustainability of which is a constant source of obsession (and rightly so.) And the Charlie Sheen thing’s been going on for years. At least, it feels like it’s been going on for years.

But it’s hard to believe that the market was really shocked by the Spanish downgrade. The fact is the U.S. stock market is due, overdue, for a correction, and even despite the central bank’s best efforts, one is going to come. Call it gravity. The news, the trigger for the sell-off, it’s just an excuse.

To be sure, there was a notable confluence of bad news today. Besides the Spanish downgrade, there was a surprising jump in jobless claims, and a surprising widening of the trade gap. These two combined to take the enthusiasm over the economy recovery down a few notches (no surprise to regular readers of this blog, to be sure.)

But the fact is, stocks are and have been overbought for some time now, and the recent reappearance of that particular species, the retail investor, that seems to come out the most at market tops only made the market even more top heavy. Woe be to the last one into a crowded trade.

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Stocks see selling with some conviction (NYSE listed volume more than 5.7 billion shares)  for the second day in a row, spurred on by fear that soaring oil prices will derail the fragile economic recovery.

Nymex crude briefly hit $100/barrel for first time in more than two years, sending shivers through industrial stocks, and stocks of companies most sensitive to discretionary consumer spending, like Tiffany and Coach.

H-P shares tumble almost 10% after disappointing earnings and outlook, and drop accounts for roughly 35 points of Dow Industrials’ decline.

First back-to-back triple-digit drop for DJIA since early June, average falls 107.01 to 12105.78, and Nasdaq Comp slides 33.43 to 2722.99. S&P 500 ends 8.04 lower at 1307.40.

No real sign that the source of the market’s current angst — unrest in North Africa and Middle East — is about to abate, so oil prices (instead of the Fed) may be calling the shots here for a bit.

Weekly jobless claims, January durable goods orders and new home sales will be tomorrow’s economic reports of interest. On the earnings calendar, GM, Target, Sears and Kohl’s all report before the open; AIG reports after the close.

Will the Hindenburg Omen lead to another market crash? (Bet you thought we were going to use another picture of the dirigible, right? Nope.)

Two weeks have surpassed since the Hindenburg Omen was initially triggered and stocks continue to drop. But whether the declines are attributable to the Omen or not, there’s no denying the human-interest element behind the indicator’s creator, Jim Miekka.

The 50-year-old Miekka, a blind former physics teacher, who is also an avid target shooter, might be the least likely person Wall Street would pay attention to. He splits is time living in remote parts of Maine and Florida, far from the concrete canyons of Manhattan, and publishes an obscure investing newsletter — the Sudbury Bull & Bear Report — that you’ve probably never heard of.

But the Hindenburg Omen — the ominous-sounding name picked only because “Titanic” had been used — has generated lots of media buzz. And as stocks closed down yet again on Thursday, jitters about the market’s future keep increasing.

The Dow Jones Industrial Average is down 3.2% since the Omen was first triggered on Aug. 12. Remember Miekka’s looking for a 20% drop by approximately the end of September, so time will tell if Miekka’s indicator will come to fruition.

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It is perhaps adding some much needed context to current (and currently under seige) rally to realize that all of the Dow’s biggest one-day percentage gains this year have come since the selloff from the April highs began. Granted, this current rally, at six consecutive sessions, looks good (although it also looks like it may not be extended to number seven.) Of course, it comes on the heels of two-week sell-off, and, it’s just one more rally the past two months that has led to…more selling.

Newswires Tomi Kilgore reports: (subscription required)

Being fooled twice is enough to shame any investor, but how about three, or even four times?

The current rally marks the fourth time since early May that the Dow Jones Industrial Average has bounced more than 5%. Previous bounces have taken the Dow above key resistance levels, and yet subsequent declines have resulted in even lower lows. Essentially, the recent pattern surrounding key technical breakdowns and breakouts suggests the Dow is nearing yet another turning point.

It is easy for bulls to fall into another technical trap, since the Dow has climbed above the 50-day simple moving average, which has acted as resistance since the Dow first fell below it in early May, and is now peeking above a downward sloping line that started at the April 26 high and connects the June 21 high. But rather than embolden bulls, the apparent breakout should actually make them skeptical, especially following a six-session rally.

There have been several false breakdowns and breakouts since the correction started in late April.

The most notable thing about yesterday’s rally may have been this: despite a strong run for the entire morning and afternoon, when the major indexes hit resistance points late in the afternoon, around 10400 on the Dow and 1100 on the S&P 500, they weren’t able to breach them.

Markets across asset classes and national borders have been wildly erratic today, and the longer that condition persists, the weaker the “fat finger” or computer glitch explanation for yesterday’s meltdown gets.

Whatever the trigger was, a bad trade, an outlier kind of spike somewhere, there were God knows how many sell orders programmed into the market’s computers. Yesterday afternoon may have been a one-off, but it was also one of those flashes of illumination, where for a bright instant you see all those vicious creatures hiding in the dark, waiting to devour you.

What markets need right now, more than good data, more than liquidity, more than an end to Greek riots, is leadership. Somebody, somewhere, in a position of responsiblity, needs to stand up and stop this thing before it goes any further. Heading into this week, it was all about the risk trade. Heading out of it, it’s all about the fear trade.

There isn’t much the U.S. can do, directly. Our problems aren’t driving this. It started in Greece, but since at the heart of this whole thing we’re still talking about a credit problem, it’s quickly washed over Greek borders. Let’s be clear here. The global recovery, and especially the recovery in the developed world, is still a fragile thing. Nobody can afford to flirt with another seizure in the credit markets. But there’s a lot of chatter about that happening among European banks. And if European banks seize, well, in an automated, interconnected world, you saw yesterday just how fast things move.

Toward the end of his book “The Quants,” Scott Patterson quotes one exec at a company that supplies services to high-frequency trading firms: “My concern is that the next LTCM problem will happen in less than five minutes.”

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If you only knew the power of the dark side.

That was manic, and I’m not quite sure anybody’s ever seen such a steep, sharp, fast plunge before. The Dow, already down 300 points in the afternoon, took a dizzying ride around 2:30 p.m., at one point down nearly 1,000 points.

There are two things going on here. One is the contagion story. The credit crisis keeps moving up the food chain, and European official made a big miscalculation in thinking they could hold it at Greece’s borders. It’s jumped the border. “”We’ve seen a crisis start in a country—Greece—become regional, impact the whole of the Euro zone and is on the verge of truly going global,” Pimco’s Mohamed El-Erian told CNBC. The guy ain’t just whistling Dixie.

The second thing is today’s plunge. At one point, the Dow lost 999 points, and it lost about 500 of those in less than half an hour. I was in college in 1987, so I’m not sure what October 1987 looked like. But I don’t know that anybody’s ever seen a plunge as deep and fast as today’s.

At the nadir this afternoon, the DJIA was down 998.50 points, which ranks as its biggest intraday drop in its history, at least on a points basis. At the bottom, the index was down 9.19%, although it rapidly came back, and finished down 3.2%, still its worst dive in a little more than a year. The index is down 5.7% over the past three sessions, biggest three-day plunge since November 2008.

But, the mid-afternoon washout may have all been a “glitch.” The word is that somebody made a mistake on a trade, that triggered something else, that triggered something else, that triggered something else. That led to the free fall. But that shows two things: one, this is what can happen in a world where trading is dominated by computers. And two, there are an awful lot of people out there ready to bail.

Wow. That was one spectacular slide. The Dow lost more than 700 points in less than half an hour, with the Dow ultimately down about 992 points.

The index has since recovered much of those losses, but still remains off 367 at 10500 with 25 minutes to go before the close.

From 2:27 p.m. ET, with the index sitting at 10633, it went straight down in a dizzying plunge. Just 20 minutes later, at 2:47 p.m., it was down to 9872, a 761-point plunge. No way that happens without everybody’s computers going haywire at the same time.

For the record, the Dow’s biggest one-day point plunge is 778 points on Sept. 29, 2008.

Here are some reactions to the selloff:

“This feels a lot like 1997 and 1998,” when financial crises gripped Asia and Russia, said Brian Belski, chief strategist at Oppenheimer Asset Management. “In just a couple of days, we’ve gone from a super-bullish mentality to a super-bearish mentality driving the markets.”

Technicians said the market blew through key support on the S&P 500 at the 1150 level and then again at 1120 and 1115. “We’re seeing emotional, indiscriminate selling at this point,” said Richard Ross, head of global technical strategy at Auerbach Grayson, noting that almost 99% of trading volume is in a downward direction. “It’s emotional selling as the market is tracking the euro lower.”

“People are feeling the way they did in the days after Lehman went down,” said Bernie McSherry, senior vice president for Cuttone, an independent broker dealer. Much as the market sold off after the TARP was first voted down in US Congress, the equity markets are waiting for concrete action from European officials. “People are just not buying and right now they’re letting their emotion get away from them and people are just getting out of the market.”

(Paul Vigna, Donna Yesalavich, Kristina Peterson and Matt Phillips contributed to this post.)

If Faisal Shahzad had blown up his Pathfinder on Saturday night in Times Square, do you think it would have affected the stock market on Monday morning? I ask that not because I’m some heartless markets guy who sees the world only as it affects equities; I walk right past where Shahzad dumped his SUV twice a day, every day. Our office is two blocks away.

I ask because pondering it is like one of those Zen koans the monks meditate on, in this case a koan that illuminates where the market’s head is these days.

Let’s assume Shahzad did his job well. He killed, say, a dozen people coming out of the theater and wounded two dozen more, on a Saturday night in Times Square, one of the most famous, recognizable places in America. In the initial panic, he gets away. Sunday morning, blood-splattered images fill TVs across the country, across the world. How did this happen? Who did it? Will they do it again? Remember, a terrorist’s main goal is to instill terror. In our scenario, Shahzad did his job well.

How does the market react? Monday morning, the papers are starting to wonder, are we losing the war on terrorism? Homegrown or foreign, does it matter? Does the Obama administration have the gumption to really take on the terrorists, wherever and whoever they are? What are we really doing in Iraq and Afghanistan? Think the market is shocked by all this? Think that V-shaped confidence cracks a bit?

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Get back in there and keep blowing!

Sell, Mortimer, sell!

Friday showed you what can happen when something from left field slams into a market like this one, a market that has been blissfully unaware of the fact that there is such a thing in as risk. When you’ve got a stock market that’s up 75% in a year and seemingly rising every day, when everybody from the White House to CNBC to the Times to Newsweek is proclaiming it’s a bright new day, it’s easy to lose sight of the risks. But they don’t go away just because the bulls want to make some money.

Risk has a funny way of rising up and smacking you down if you don’t pay it respect it.

The aftershocks of the credit crisis are still being felt, still working through the markets. It couldn’t be any other way. But the Street forgot about all that, so enamoured were they with their profit-making ways. They conveniently overlooked the little things that helped them out, like 0% interest rates, or the suspended mark-to-market rules, and thought they were doing it the old-fashioned way (and given what the SEC alleges, we’re not exactly sure what constitutes the old-fashioned way anymore.)

We have not had even a 10% correction throughout this entire rally, but one is coming. If the market’s lucky, it gets off with a 10-15% correction. If it’s not, well, it’ll be worse. Before Friday, I would’ve bet on May for a selloff, for reasons beyond the old “sell in May” trope. Now, it could come earlier. And the Goldman case isn’t the only thing lurking out there.

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US stocks rebound from January’s selloff, racing out to sharp gains as a couple of economic indicators come in stronger, and the White House outlines its budget for the upcoming year.

DJIA rises 118 (1.2%) to 10185, S&P 500 gains 15 (1.4%) to 1089, Nasdaq Comp jumps 24 (1.8%) to 2171. The market was due for a bounce after the last two week; remember, stocks never travel in a straight line, either up or down. And the beginning of the month often brings in new money from pension funds and the like. The bounce might even last a few sessions. The real question is how sustainable is it, because this market is also very overdue for a real correction.

Energy, materials rise sharply as crude gains, even as Exxon posts a big slide in profits — to only about $6B. Personal incomes rose in December, and while spending rose as well, it didn’t rise as much as expected. White House outlines $3.8 trillion budget, $1.6 trillion deficit.