Usually when someone says "this time is different" we automatically raise an eyebrow, because we know that seldom is "this time" any different. Markets are notorious for repetitive behavior. In fact that's one of the secrets of successful trading: taking advantage of the repetitive nature of people and markets. What moves markets is economic environment and emotion; in either order. Emotions feed off the environment and will often extend a market move even after environmental conditions have changed. That dynamic is what creates the underlying market movements we call bull markets and bear markets. What has been different about the economic environment these past several years is the influence that global central bankers exert on markets in carrying out their social/economic policies. If you had not noticed this change at the beginning of 2009, with the advent of The American Recovery and Reinvestment Act of 2009, a.k.a. QE I, you probably did not have such a good go of it these last few years. The QE's and the zero interest rate policies they heralded in have been game changers. Regardless of what you thought the economy's prospects were over the past several years, as a trader or investor you had little choice but to go with the bull flow of things if you wanted to survive.
European countries were in a similar situation. Regardless of what they thought was best for them they had little choice but to go along with what the Germans and the ECB dictated. The Italians today however, may be signaling a different course by resurrecting their aging former PM, and reformed playboy, Silvio Berlusconi. While confusion as to whose ruling Italy may be good cause for concern on the Continent, where a delicate, and intricate arrangement between a variety of countries and characters have kept the banking system and economy afloat, why should it panic U.S. stocks like this? Pre-January FOMC minutes it may not have, but the possibility of the Italian complication upsetting the balance the ECB has engineered , combined with dissent at the Fed with some members wanted to stop QE III by year end creates much more uncertainty for the markets than they faced just a week ago. What kept traders and investors harnessed to the long side of the market these past several years was seeing the lengths that central bankers were willing to go to prevent a market panic and restore economic growth. While Bernanke and Draghi are still committed to those lengths their opposition is becoming more obvious and the market is taking notice. Which takes us back to what is a little different about this cycle all along: it was not based on an economic recovery, but on the success of central bankers to engineer a recovery. If the ECB does not succeed because of an obstinate Italy, or any other member, and opposition against QE by FOMC members grows, markets will lose confidence, as they did today. This is especially frightening because it takes away the current end game: economic recovery, for the foreseeable future.
Jay Norris is the author of The Secret to Trading: Risk Tolerance Threshold Theory
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.