Stocks successfully tested their summer lows Thursday, but they are likely to take another run at them, as investors remain fearful of recession and a European banking crisis.
The Dow lost 391 points, or 3.5 percent, to 10,733, after touching below its August low of 10,719. The S&P 500 finished down 3.2 percent at 1,129, after dipping beneath its August low of 1,119. As investors fled stocks, they were big buyers of Treasurys, driving yields to record lows. The 10-year was yielding a record 1.71 percent, and the 30-year was at 2.794, a level it last reached in late 2008.
Investors also sold commodities, with Brent crude falling more than 4 percent to $105.49, and gold slumping 3.7 percent to $1739.20 per ounce. Copper was a big loser, down 7.3 percent at $3.48 per pound on concerns of a global slowdown. China reported weaker manufacturing data overnight, adding to a selling spree that started with the Fed's post-meeting statement Wednesday.
"We're seeing new lows and testing the patience of investors and finding out that we don't have as much control over things, as we wish we did. I just kept hearing 30 percent chance (of recession), 40 percent chance and now, all of a sudden, the market is saying we could see 90 percent," said market guru Laszlo Birinyi.
"I'm not all that comfortable with the market because there's so many issues that are beyond my ability to grasp, so my feeling is there are a lot of stocks that are interesting and worth buying," he said. "It's just a case of at some point people will just forget about the bad news and realize Apple is going to sell a zillion phones and people are still going to go out and do search."
He said there is a major dichotomy between the negative news on the European debt crisis and economy, and the good news from companies. "We don't know what's happening in Germany, but we do think you can make money buying stocks. We want to keep buying, but you don't want to play in the financial area. You want to stay away from commodities because they're too closely tied to emerging markets," he said. He also added investors should not load up on defensive plays like utilities because they do not outperform.
There's no major data Friday so investors will be watching for comments from G-20 officials at the IMF meeting in Washington. However, there is little hope anything will come of the meeting that will satisfy the markets' anxiety over the European debt crisis.
Scott Redler, who follows the market's short term technical moves at T3Live.com, said its possible the S&P will break below 1,101, the intraday low from August. He notes ETFs for major sectors have already broken support. Those include Oil Services Holders SM Trust, Materials Select SPDR, the Industrial Select Sector SPDR and SPDR S&P Homebuilders ETF. He said a break below 1,101 could result in a move to 1,070, and then possibly to 1,010 or 1,030.
"Traders are looking to short rallies, as there is technical damage everywhere. At this point, bad news is not good news yet," he said, in a quick note.
The market has been disappointed by the lack of progress toward a bigger solution to the debt crisis by European officials. Last weekend, European finance ministers ended a meeting with no new plan to recapitalize European banks, as sought by the markets. The IMF, European Central Bank and EU are also putting off until October a decision on providing Greece with its next funding tranche, needed to avoid default. Greece claims progress was made in talks this week.
Speculation continued to swirl Thursday about the health of European banks due to their exposure to European sovereign debt. The Fed's statement Wednesday also increased the level of concern about a recession when it described risks to the economy as "significant" and noted that "strains in global financial markets" (or Europe) could be a catalyst. Then overnight, a preliminary China manufacturing data showed moderating growth.
The Fed also unveiled the much anticipated $400 billion "Operation Twist" program, in an effort to drive down interest rates, push banks to lend and steer investors into riskier assets. The program, which involves swapping $400 billion of its short term Treasurys for longer duration Treasurys, got a lukewarm reception even though the Fed also surprised markets with a plan to also buy mortgage securities.
"The Fed kind of put out their best shot yesterday and the market didn't buy it. It's really starting to feed on itself at this point," said Brett Rose, head of U.S. rates strategy at Citigroup.
Rose said the Fed does not have that much fire power with the "twist" program. "What they have is their credibility and the confidence they ensure. When you have a market act like this after they do act, it raises a big concern," he said.
"I think why we have this second leg lower is people are concerned that if this doesn't work, you would have a big correction in risk assets," he said, adding the selling could continue. "The news out of Europe continues to be poor. The Congressional negotiations on whatever package continues to be contentious and unproductive and reminds people of the debt ceiling fiasco. There's really not a lot of positives to take away. The economic numbers, while they are not terrible, they are not great."
Wells Capital Management chief investment strategist James Paulsen said he is hopeful the macro data will start to turn things around. "I'm taking my cue from the high frequency data on Main Street, and the data tells me there's no sign of recession yet," he said. "We had another multi-month gain in leading indicators. Nike just reported earnings that outpaced expectations. If we get out past the October jobs data, and we don't' get numbers that say we're going to fall off a cliff, then greed could take over as we look at those (stocks trading) at 11 times earnings."
Paulsen said he thinks there's a chance the market holds the August lows. But "if the data starts going south, we're going to break down, maybe go to that 980 level (on he S&P 500). Outside of that, I think we're pretty close to the lows," he said.
What Else to Watch
New York Fed President William Dudley speaks at 2 p.m. at the Bretton Woods International Council Meeting in Washington. German Finance Minister Wolfgang Schauble speaks at the Council on Foreign Relations in Washington at 12:30 p.m.
There is a G-20 press conference at 8:30 p.m. in Washington.
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