Picture of a Market Scared of Its Own Shadow

After Asian equities posted their biggest gain in the recent weeks on Monday, European and US stocks declined on concerns about the financial markets.

Equity markets have developed a pattern of trading lately: every rally is short-lived because either inflation related-fears appear or rumors show up that banks may be constrained to have another round of write-downs based on the latest trends of credit rating agencies cutting the debt rating of various financial institutions on a daily basis.

The S&P is now testing the 1260.00 support area, which proved to be very important in the past. This area corresponds to the low points on 24th of January and the low made in March, when Bear Stearns was bailed out by the Fed. If the index will break under the 1260 level, it is very likely a wave of short orders will join the market.

Overall, this paints the picture of a market scared of its own shadow, in which traders have large sentimental swings. This creates a lot of volatility, something that can be seen on every chart, but in the same time despised by every trade desk or retail trader. The truth is that the financial institutions may have some hard times ahead, and the market, as the economy, will have a very hard time pushing things around without them.

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Comments

[mangum:]

Fear drives everything and fearmongers are on every hand. That's why I laugh when I hear "the home of the brave" anymore.

2008 Aug 26 12:09 PM

[waldteufel:]

I'd have to agree with Mangum. There should be a rule that once you buy stock from a company, you have to keep it for a year before you can sell it.

2008 Aug 26 03:06 PM

[elwind45:]

Anthems? We dont need no hollow anthems!! Just a stronger right shoulder.

2008 Aug 26 05:04 PM

[Steven Hansen:]

it is not fear driving the market - it is lack of positive fundamentals. if you believe GDP growth is basically zero, what stock deserves a higher price. the perma-bulls keep trying for a rally that has no foundation. relax, this might be a very long fall and winter.

2008 Aug 26 10:26 PM