Investors are heading for their financial bunkers as confidence in the government's ability to turn around the financial crises dips to a new low.
On a day that the U.S. poured another $30 billion into ailing AIG, investors fled stocks and other risky assets for the security of Treasurys and cash. The Dow fell nearly 300 points to 6763, or 4.2 percent while the S&P 500 fell 34, or 4.7 percent to 700.82, levels not seen since October, 1996. The dollar and bonds gained.
Traders say the mood is about as miserable as they remember. Fear is again ruling the markets, and they reported little interest among investors to do anything but pull money from stocks.
"It just strikes me as a self-fulfilling prophecy. We're all talking ourselves into this, and it's happening," said John O'Donoghue of Cowen. "... We would talk about people moving out of equities and into bonds. Right now, it's out of equities and into cash."
More From CNBC.com
- Get After-the-Bell Dow 30 Quotes
- Credit Spreads and Libor Data
- Futures and Pre-Market Data
- Currency Data
President Obama's budget, released last week, has also contributed to the wobbliness in stocks, O'Donoghue said. The budget includes tax increases for the wealthyand reshapes health care, among its targeted programs. "I think his proposed budget shook up a lot of people...The overwhelming bias is we are in for an era of big government and the involvement of government in the economy like we haven't seen since the 1930s."
On Tuesday, Chairman Ben Bernanke testifies on the economic outlook and budget before the Senate Budget Committee at 10 a.m. Then, Treasury Secretary Timothy Geithner, not seen since he unveiled his bank bailout, testifies on President Obama's FY 2010 budget at 12:30 p.m. before the House Ways and Means committee.
Deutsche Bank chief U.S. economist Joseph LaVorgna said he does not expect much news from either event, unless Geithner surprises with some new detail on his bailout plan. "The problem has been that policy makers have been too slow to really grasp the seriousness of the situation, and they're jumping away from their own policies," he said.
Other economic news expected Tuesday are pending home sales at 10 a.m. and auto sales, released throughout the day. Kroger and Hovnanian report earnings. The Fed may also announce it is starting its TALF program for securitized consumer debt.
British Prime Minister Gordon Brown Tuesday will be the first European leader to meet with Obama at the White House. On Wednesday, Brown addresses a joint session of Congress. European markets sold off on new worries about HSBC but also after the European Union failed to deal with the deteriorating situation in Eastern European countries.
The faltering global economy weighed on commodities prices Monday. Oil fell $4.61 per barrel, or 10.3 percent to $40.15, on fears the global slowdown will crush demand.
- Charts Show Dow's Heading Below 6,000
But it's the stock market where the debate is most heated. The S&P 500 broke its November lows last week, and some traders have said the market could be heading toward capitulation. O'Donoghue said some stock market technicians are now forecasting steep declines in stocks, that would take the market back to levels it was at in the 1980s Reagan era."The market tells you there's no sense of confidence in having the government run anything. Having said that, look at what the private sector did. They just messed it up. Here, we're just stuck in a bind ... I hate to be such a gloomy Gus, but I just don't see a way out of it just now," he said.
Interestingly though, Doug Kass of Seabreeze Partners said on "The Kudlow Report" Monday that he thinks the S&P could see its low for the year sometime in the next two to three days.
Scott Redler of T3live.com said Tuesday's trading will be very telling for the market short term, but he doesn't see capitulation yet. "Tomorrow, depending on how we open, we think we can get a little bit of a tradable move. I don't see the indicators with the volume, the VIX and the fear at a level where we'd see a capitulation bottom, but this is a definite area of interest which could serve as an oversold, tradable bounce," said Redler
"A break below 700 might create the cascading acceleration to the downside which should serve as a catalyst for a reversal. The area where we would look for a turn would be the 660 to 680 zone. If it reverses back to 700, that would be confirmation that we have a short term tradable bounce," he said.
Brian Stutland, president of Stutland Equities, trades the VIX, the Chicago Board of Options Exchange's Volatility Index. The VIX, which serves as Wall Street's fear index, rose more than 13.5 percent to 52.65 Monday.
"I'm starting to feel with the way things are trading that panic is picking up a little bit. It feels like since we broke the November lows that there's really not much support in this market," Stutland said.
"Basically, the VIX is predicting 3-1/2 percent moves in the S&P 500 on a daily basis," said Stutland.
Questions? Comments? firstname.lastname@example.org