New fear on old news is driving today's drop

09/22/2011 12:22 pm EST


Jim Jubak

Founder and Editor,

So what’s new this morning? What’s new today that has ratcheted fear up another level?

The Standard & Poor’s 500 stock index is down another 2.78% as of 11:30 a.m New York time this morning. That, on top of the 2.9% drop yesterday, brings the four-day pummeling to 6.5%. The MSCI All-Country World Index has moved into bear territory—it’s now down 22% from the May peak.

Most of what is moving the market this morning—and the day before and the day before that—is actually new fear on old news.

Yes, in yesterday’s announcement the Federal Reserve’s Open Market Committee stressed that it saw “significant downside risk” in the U.S. economy. But, gosh, didn’t we know that?

Three Italian banks were downgraded by S&P today. Following on the downgrade of all of Italy on Tuesday, this is surprising?

Yesterday Moody’s, which is playing a competitive game of “Can you match my downgrades?” with S&P cut the ratings on Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC). Not good news, I grant you, but again nothing you didn’t know if you’ve been following the headlines of the bad mortgage problems at Bank of America and Wells Fargo and, well, we all know that Citigroup is still trying to unload the bad debt they piled into their bad bank structure.

On September 14 Moody’s downgraded two major French banks—pretty much what the company had promised in June when it placed Credit Agricole and Societe Generale on credit He watch.

At 1132 on the S&P 500 we’re again within striking range of the August low for the index at 1120. (I think this pretty much answer the question I posed a few days back of “Have we broken out of the market’s trading range?” The answer is as pretty resounding No.)

What worries me here is that we’ve got several days—the run up to the weekend’s meeting of the International Monetary Fund in Washington and then the weekend itself—of what is likely to be negative news flow. You’ll see more stories along the lines of yesterday and today’s “Fed acts but is powerless to help economy” over the weekend with the International Monetary Fund replacing the Fed in the headlines. You’ll see a weekend of speculation about a Greek/Italian default and the weakness of the European Central Bank.

All of this is true. And the fact that we’ve heard it all before doesn’t mean that this negative news flow won’t be strong enough to push an index like the S&P below one of the technical levels—such as 1120—that is likely to trigger the big institutional computers into action. Now I don’t know if those computers are programmed to buy or sell at that level—I suspect buy—but I do know they’re programmed to do something. And that this something will be big enough to move the market another 2.5% or 3% on a day in one direction or another.

In other words, I think in the very short, short term—like two or three trading days—this is a very risky market just because the odds are that we’re looking at a big move one way or the other and I can’t tell you with any degree of certainty which way that move will be.

In the short, short term I’m not loading up on anything, although some of the prices here are very attractive. I’ll wait until we get past the weekend. That will bring us closer to what I see as a major turn in the news flow from overly pessimistic—Not only will the frost giants storm Valhalla but Odin’s ravens will peck out your eyeballs—to modestly optimistic—As long as the mead is good, what do I care who runs Valhalla?

More on that potential turn in the news flow in my next post in about an hour.

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