Market Corrections Can Sometimes Turn into Bearish Markets

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Jackson Hole Repeat for Stock Index Futures?
By Carley Garner
August 22, 2011

Stock index futures continue to be plagued with massive volatility and what seems to be a "buyers strike". Despite several attempts at rallies, traders simply weren't willing to hold large equity positions into the weekend. Adding to market volatility was expiration of the August options.

The global financial markets have fallen into a vicious circle of bearishness that, once started, can be difficult to thwart. For instance, traders in the U.S. look at the European markets for guidance, if the indices are down significant across the pond domestic traders tend to be heavy handed. Similarly, Asian markets watch the U.S. session, and if they close lower it dramatically hinders the odds of a positive open there. Eurpeans, on the other hand...look to Asia. You can see how the phenomenon feeds on itself and can turn a normal market correction into a full-blown tragedy.

The slightly slower paced selling suggests that traders could be preparing for the infamous Fed backstop. The Federal Reserve has an uncanny ability to turn the market on a dime on news of the latest stimulus but with so few bullets left in the chamber, some wonder if this is even a possibility. Nonetheless, the bears haven't forgotten Bernanke's Jackson Hole speech that triggered a massive multi-month rally thanks to QE2. We doubt he'll have anything to say about a QE3, but he will likely attempt to come to the market's rescue. On a side note, there were some unsubstantiated rumors floating around in regards to an emergency Fed meeting over the weekend. Being an optimist at heard, I can't help but feel as though the market will eventually work through its problems and recover. However, the near-term outlook is highly uncertain and we are probably in for more pain before things get better. Although we feel like current action is an attempt at a bottoming process, it seems the September S&P is destined for a retest of the 1100 area and maybe even the 1077 low. Look for support in the Russell near 620 and in the NASDAQ at 2007.

From Thursday, but still relevant:

It seems silly to see such market volatility in light of the recent blockbuster earnings season, but this is the world that we live in. I think it is fair to say that most of the market turmoil as of late can be attributed to Europe, but traders fear that chaos overseas could drag us down. In fact, a bulk of today's selling was done on a mere rumor of a troubled bank across the pond. Supposedly, "someone" borrowed funds in what seemed to be a hasty manner from the ECB's discount window.

As a result, the markets nearly priced in another Lehman collapse despite widespread belief that the banking system is much more healthy at this juncture...I seem to remember European bank stress tests in the recent past that went relatively well. However, the fear is that the current "crisis in confidence" could turn nothing into something very quickly. After all, the Lehman and Bear Stearns collapse materialized very quickly as their lines of credit froze and clients ran for the hills. These markets are not for the faint of heart and certainly pose challenges for traders. Despite internet chat rooms filled with self-proclaimed beneficiaries of the stock market crash, we are hearing the opposite from many professional traders and desks. Hedge fund blow ups have been in abundance and similar to the 2008 debacle, margin calls trump logic and become a reason to liquidate indiscriminately.