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Markets Before and After the Panic

September 8th, 2011 – There is no question that most market participants are in a state of panic. Long-term investors are scrambling to dump stocks and move into what they believe are more stable investments such as precious metals and bonds, while active traders are enjoying the massive volatility spikes and ultra wide swings in the major indexes. In fact, just the other day, the VIX spiked an astounding 40% while the S&P 500 plunged more than 4% on the session, after a 2% climb higher over the last several days prior. The recent low on the benchmark S&P 500 was 1101. This is a critical technical support level and technicians are exceedingly bearish.

This extreme volatility is a far cry from the tight channel the S&P 500 was trading in prior to Standard & Poor’s downgrade of the U.S. credit rating. Supported solidly by the 200-day simple moving average since the start of 2011, the index ebbed and flowed along the shorter length 50-day moving average until the panic started on July 25th at the 1347 level. Price quickly cut through both the 50- and 200-day moving average support levels like a hot knife through butter. Thus, the panic commenced. Agile active traders jumped into the fray making the most of the newly generated volatility, while buy and hold types sweated the adverse moves.

What does the future hold for equities now that the Standard & Poor’s U.S. debt downgrade has been made official? Let’s take a look at the facts. First, the economic situation is dire. In both Europe and the U.S. debt threatens to hold financial markets in a strangle grasp. This is nothing new, but, until recently, it went away with the stroke of a pen. In addition to the debt situation, weak economic numbers are arriving in droves in the U.S. This has done nothing but increase the volatility and rattle investor confidence. Lastly, the financial meltdown of 2008 remains burned in most of their minds. The good news is that over 80% of all the reporting companies in the S&P 500 have met or exceeded analysts’ estimates. The corporate situation remains healthy despite the flagging economic picture.

Given this scenario, it is unlikely that the stock market will make up the lost ground by the end of the year. However, it is also unlikely that it will go much lower. At this time, it appears that the most realistic scenario is for the equity market to close out the year well off its current lows, but likely below the 50- and 200-day moving averages. Keep in mind that these are simply projections based on the available information. As you know, anything can and does happen on the Street of Dreams.

Copyright 2011 Lightspeed Financial Inc. All rights reserved. Any comments or statements made herein are not an endorsement of any trading strategy or security and are made for informational purposes only.