Is The Japanese Rally Over?

Markets are lower this morning on some panic selling overseas which weighed on stocks here in the US for a second day.  This overshadowed some positive economic data with jobless claims lower than expected and new homes sales for April coming in well above expectations.

Last night Japan saw a huge 7.3% plunge in the Nikkei.  The selling started after trading in the Japanese Govt bonds had to be halted.  The strengthening yen exacerbated the pressure and the Nikkei saw a drop of 1500 points from high to low.  It also probably didn't help that China's HSBC manufacturing index fell back into contraction (49.6) for the first time in seven months.  The Bank of Japan finally moved in and injected 2 trillion yen to calm markets.

Of course, Japan's stock market has enjoyed a huge rally since the BoJ announced its massive quantitative easing program there.  At some point you expect some profit taking, but this large decline shows what happens when stocks get extended and everyone tries to hit the sell button at the same time. 

Europe had some positive data in the form of higher than expected PMI manufacturing readings, but overall he region is still in contraction.  Spain auctioned off 3-year and 5-year debt at higher yields than its previous sale.

The dollar is surprisingly lower today and commodities are mixed.  Gold is higher near $1385 as is silver.  Copper prices are lower and oil prices are also weaker to $92.65.

The 10-year yield is above the 2.00% level after a big upside reversal yesterday following the Fed minutes. 

The volatility index hit the 15 level this morning for the first time in a month.  If it closes above 15, I would expect more selling.  But below that level is likely more of the same.

Trading comment: We already did some trading this morning, taking advantage of the dip for a second day.  So far this year, the S&P 500 has only had one 3-day losing streak.  That means the odds favor buying day 2 of the weakness, if only for a bounce.  That streak could be broken tomorrow, but we are taking advantage of a few stocks that have pulled back to attractive levels.  Some of the REITs had very sharp 2-day pullbacks also.