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Test Day

Folks, when you’ve been watching markets as long as I have, you start to notice some patterns. One of those patterns is that when a market wants to go up, a lot of times it will open lower and grind its way higher throughout the course of the session.

As you know, we’ve seen three straight days of gains—that tear-your-heart-out-if-you’re-short rally I predicted last week. This morning, however, the markets took their cue from Europe and opened lower. We’ve talked about this quite a bit: European banks are feeling pressure of the sovereign-debt troubles within the European Union and also reacting to slow growth in Germany, so they’re liquidating their portfolios in order to repatriate capital back home. This puts pressure to the downside on U.S. equities.

Keep an eye on whether U.S. portfolio managers end up buying this early weakness and driving prices higher throughout the course of the day. If they do, it could be a good signal that the problems we’ve been having with volatility are coming to an end. Today will be a good test: we’ve already gotten back to pre-downgrade levels, and a lower level of volatility could put the focus back on fundamentals.

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