Stocks could see another fierce move down, but some traders and strategists say the worst rout since the 14-month rally began may be closer to its end than beginning.
They also caution the depth of the correction will be determined by unpredictable events outside the U.S. The market is also being whipped by worries that new banking legislation will restrict profits and credit, and concerns that the events in markets themselves will hurt the global recovery. The Senate approved a sweeping Wall Street reform billon Thursday night in a 59 to 39 vote.
The stock market Thursday officially entered correction territory, as the Dow's 3.6 percent tumble took it to a 10.2 percent decline since April 26. The Dow held above the 10,000 mark for now, closing at 10,068. The S&P 500 lost 3.9 percent, falling to 1071, a 12 percent decline from its April high. Nasdaq fell 3.1 percent to 2205, and it is now down 12.9 percent from its April high.
The Dow is still up 63 percent from its March, 2009 low. The S&P is up 58.4 percent, and the Nasdaq is up 73 percent from the March, 2009 lows. But the market's wipeout Thursday was the worst percent drop for the Dow 30 since just before the rally started on March 5, 2009.
The euro , which had been leading the sell off, bounced in New York trading, as rumors of central bank intervention once more circulated. The dollar fell 1 percent against the euro, which reached $1.2511 by the session close. Currency traders were focused on a vote on the European stabilization package by the German parliament early Friday morning.
"It seems to me like we're in the latter stages of capitulation, unless we get higher funding costs in the global banking sector," said Robert Sinche, chief investment strategist with Lily Pond Capital. As investors bailed out of risk assets, credit spreads have widened and Libor has been moving higher for several weeks.
Sinche said that move in Libor is still minor compared to the levels seen after the demise of Lehman, when the U.S. credit crisis was in full tilt. "Three month Libor/OIS has widened out to 25 bps from roughly just below 10 last month, which looks big unless you compare it to the 350 bps after Lehman. An increase in funding points of 15 bps will eat into bank profits but probably not derail a pretty good global expansion," he said.
Stocks took another leg down late in Thursday's session before the Senate approved a regulatory reform bill for the banking system. The Senate bill must now be reconciled with the House's version of financial reform. Some of the thornier issues for the industry, like the proposed ban on swaps trading, will be resolved in committee-level discussions between the House and Senate.
Financial stocks were the worst performers on the day, losing 4.7 percent.
"I think we're at the end (of selling), but I thought that two days ago," said Steve Massocca of Wedbush Securities. "It's turning out to be more of a doozy, but I think we're close..I saw some stupid things going on today. I think companies that have some reliable dividend streams were being sold just to be sold, and everyone's running to the 10-year. Biotech got reamed in some areas, but its biotech and you kind of expect that in a bad market."
"I'm not sure I fully understand this decline at this point. It's pretty macro..it's all momentum driven. It's fears that Europe is going to blow up, and it's selling begetting selling," he said.
The market was sharply lower most of the day, but saw a number of big swings, as did the euro dollar and commodities.
"These kinds of movements would tell me there's not much fundamental flow at all," said Sinche. "It's all liquidation. Those who can will just wait until there's some sense of stability, and until we can assess whether there is anything in the global banking system that we need to be worried about. Then we'll sort of of sort through the discrepancies that we think have developed in the market and look for opportunities."
"There's no reason to step in front of it right now. I think there will be a time where we find out global growth is continuing, that the worst risks aren't materializing and we'll probably see the dominant trends from the early part of the year reassert themselves," he said.
Sinche said the euro may be setting a near term bottom. On Wednesday, it touched $1.2144, a hair above the 50 percent retracement level between its 2000 low and 2008 high.
"That may be we put in a bottom, but boy, that $1.2134 range becomes huge now if euro dollar comes back and retests," he said.
Richard Bernstein of Richard Bernstein Capital Markets said he's still bullish though he doesn't try to make short-term market calls. "But as an observer, everybody was looking for a correction. Then it came, and now everybody's talking crash. How did that happen? If you thought there was going to be a correction, why are you upset that there's a correction?" he said.
Bernstein said he's frankly more concerned about the U.S. than Europe. "I still think this is a correction. For the first time in a long time, I was spooked not by market action, but by jobless claims today. I've been saying that's one indicator people should be watching. Next week's claims are uber critical..If U.S. employment is not picking up here, we've got something to worry about, and I think I'd be changing my bullish stance," he said.
Weekly jobless claims, reported Thursday, rose by 25,000 to 471,000 when economists had expected a number smaller than last week's level.
Bernstein said another worry for investors is the fact that the SEC and CFTC said earlier this week they still did not know the cause of the "flash crash" which took the Dow down 1000 points on May 6 and turned a number of equities into penny stocks temporarily. "That we still don't know why it happened is inexcusable...It's a combination of their ability to uncover what's going on. At the same time, you have a completely fragmented trading system," he said.
Jon Najarian of OptionMonster.com agreed the lack of resolution on the "flash crash" fed into investor concerns. He said Thursday's market action was also impacted by Friday's options expirations. He said he expects the S&P to touch 1066 before the selling is over.
He said bigger investors were finished rolling over contracts by Thursday. "All the big funds rolled already, and all the small to medium sized players were panicked today," he said.
Cowen's John O'Donoghue also said Thursday's big swing down had a lot to do with options expirations. "I think the mood in the options pit turned specifically quite bearish late last week, and I think a lot of this is getting pushed down from options expiration," said O'Donoghue, who heads equities trading.
O'Donoghue also says the unresolved issues around the May 6 market decline continue to scare investors.
He said, however, if there are no negative surprises over the weekend, the market could calm down. "I think cooler heads will prevail," he said.
"I think the world is slowing down and the world is is still levered. Having said that, things have picked up here a little bit, not dramatically, so there's the potential that if we get some positive jobs movement and some jobs recovery..we could be okay," he said, noting corporate balance sheets and earnings are strong.
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