On Tuesday, bulls were starting to wonder if the rally had led them straight to the slaughter house.
Stocks fell for a 5th consecutive day with the Dowtumbling by triple digits.
The technical action alone was enough to make buyers ill. The S&P broke below 1370, a level that should have generated support. “1370 was my line in the sand,” says trader Steve Grasso.
(1370 was the May 2011 high and a point of strong resistance last year. According to technical analysis, what was once resistance becomes support and therefore 1370 should have held, but it did not.)
“Theoretically we can drop pretty fast now – we can go to 1325,” he says. “Breaking 1370 changes the whole dynamic of the marketplace.”
And those weak technicals seem to confirm the market’s worst fears on fundamentals. “You have to ask yourself, are we back to the old stock market? One that is euro-centric.” One that rises and falls in tandem with developments overseas.
Grasso goes on to say that Spain has really spooked his colleagues on the floor. On Tuesday word surfaced that Spain's banks may need more capital if that nation’s economy deteriorates more. The developments triggered concerns that some of Spain’s banks might not survive a recession made worse by a government austerity drive.
“Remember, the market rallied in January because we thought Greece was behind us,” Grasso says. But Spain suggests it's not over - we remain at the mercy of Europe.
Trader Brian Kelly sees the situation in the same way. “I’m on the sidelines,” he admits. “We’re again confronted with the notion that Europe is a problem.”
Even the usually bullish Pete Najarian is worried. “With the Vix trading around 21 I get concerned,” he says. “The Vix is trading above its 50-day – elevated volatility is concerning.”
Trader Simon Baker advocates trading cautiously right now. “If your stocks are hitting your stops – take your lumps and move to the sidelines.”
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