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Why Have Stocks Stabilized?

After a wild open, a funny thing happened: stocks stabilized almost immediately. Widely watched market indicators (VIX, TRIN), also came off their extreme readings.

And Nikkei futures—which trade here in the U.S., at the CME, and which is not widely watched by the U.S. trading community—began rising.

Here is the thinking of traders:

1) some are trying to look past the nuclear uncertainty, arguing that the Japanese authorities will soon find a way to stop the radiation, either by successfully shutting them down, encasing them in cement, or some other method (a big assumption).

2) there will be an industrial rebuild. Yes, you will have a hiccup for 2-3 months, a delayed recovery, but there will be a rebuild. Excess capacity—a major feature of Japan in the past 20 years—will be less evident in the rush for cement and steel.

3) down 18 to 20 percent in the Nikkei is too extreme.

4) the Kobe disaster in 1994 was an excellent buying opportunity.

So why is the Dow still down almost 200 points? Because the nuclear situation is unknown--and if it gets worse, the markets will drop more.

And remember that traders have been hit hard this week, particularly at the open today. Why? Because they were positioned wrong. Remember last week? It was all about the Middle East. So traders were long the market, but they hedged by going long oil and gold as well. Suddenly, all that reversed on another event, the Japan quake. That caused a lot of pain.

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