Saturday, 06 February 2010 00:16
After starting off the first two weeks much the way we left off 2009, the markets seemed to hit an air pocket and are now within earshot of a 10% correction. Why?
Here are the catalysts for the recent decline:
1) Sell the news. Investors alreeady bought the "rumor" of higher corporate earnings and the possibility that Scott Brown might win in Massachusetts - this helps explain the lack of any meaningful correction at the end of last year and the very strong start to 2010. The market's reaction in the wake of the actual good news indicates that earnings (74% of all companies have beat the consensus so far) and Scott Brown may have already been baked in the cake.
2) Instead of moving to the middle after the Scott Brown election, President Obama doubled down on the populist rhetoric, vowing to move forward on health care reform, threatening a new bank tax and proposing the so-called Volcker Rule.
3) China, The Chinese are putting on the brakes, curbing in bank lending in order to avert a potential bubble.
4) Greece. Bond default worries in Greece has spread to worries about Portugal, Spain and Eastern Europe. While these nations are very small in the whole scheme of things, the Euro has weakened considerably, causing the relative value of the dollar to surge. An unwinding of the so-called dollar carry trade has resulted.
5) Technicals. The selling pressure tested previous support areas for the major market indices, forcing chart watchers to sell for purely technical reasons.
While I believe strongly that we are closer to the end of this correction than the beginning of something more dire, the news out of Europe serves as a wake-up call for the danger of vast deficits.