Investors are getting hit from all sides — the World Bank cut its global growth forecast, oil and other commodities are under more pressure, earnings season is off to a mixed start and this morning, U.S. retail sales were a huge disappointment.
So, Janet — What now?
The news today is not that alarming, really — if you have been paying attention to the signals. In fact, it may just be what the administration needs to realize the error of their ways. Monetary policy — although always a stimulus for the markets — alone will not solve the deep-seated problems that remain in economies around the world. The markets are screaming for structural reforms — in Japan, in China, across the euro zone, in the UK, In America — it is a wake-up call for elected officials to use their heads for something other than a hat rack.
The break in the market is much more about the technicals right now and the lack of clarity. The inability for the S&P 500 to hold at the 50-day moving average over the past two weeks has proven to be the catalyst for a move lower, as the market tries to shake out the weak links and rebalance. We tested the 100-day moving average at 1995 in the minutes right after the opening and found some support that is a positive for now. But realize that the market wants to test lower — it wants to test the longer-term 200-day moving average at 1965 on the S&P or 17,000 on the Dow. Further weakness in earnings that catch investors by surprise will be one of the catalysts for that move; next week's European Central Bank announcement and Greek elections will be the other. If the markets get what they expect, then we will see them stabilize and possibly see another V-shaped reaction — a la the October and December "corrections."
I was asked this morning on Twitter if there was panic on the floor. The answer to that is: Absolutely not! It is not the floor that creates panic — it is the combination of access to the markets by anyone with a computer who can use high-speed technology to affect the pricing mechanism. It is the design of current market structure that allows for technology to spray order flow across the 11 exchanges and 50+ alternative venues that creates the panic. It is electronic-market making and the rules set that does not force those market makers to remain in the market during times of stress. It is trading in sub-decimals that creates additional chaos as automated systems game each other. It is the complicated market structure of today that creates the panic. It is so NOT the floor traders on the NYSE that create panic.
There is not — nor was there — any sense of panic this morning at all. What there is, is frustration. Frustration with fiscal policy, monetary policy, interest-rate policy. Frustration with the lack of leadership. Frustration with the mixed messages coming out of the Federal Reserve and the individual members. It is the lack of insight into what is next for the euro zone and what that then means for the broader global economy. In the end, the markets will price in the appropriate risk once it gains some clarity - clarity that I expect will come next week. Until then expect the volatility to continue and any extreme dislocation in prices will be a huge opportunity for investors that have an iron will.