Has The Summer Correction Started?

Our markets sold off hard yesterday after the FOMC meeting and global markets continued that trend overnight.  I am a bit surprised by the severity of the selloff given that the market pretty much already knew what Bernanke was going to say.

The Chairman said that we must see continued improvements in the economy before adjustments can be made to the asset purchase program.  So I don't view those comments as nearly as hawkish as the market seems to be interpreting it.  If we get weak economic data in the second half of the year I could see the Fed pushing any tapering into 2014.  But we knew it was coming at some point.

The 10-year yield reversed higher yesterday and is rising again today.  It is currently testing resistance levels at 2.40%.  This is a key level to watch as the 2.40% level has basically marked the high range for bond yields for the last 2 years. 

Economic data was pretty good this morning, but that doesn't seem to matter right now.  May existing home sales rose to 5.18 million units from 4.97 million the prior month.  The June Philly Fed survey rose to 12.5 from -5.2 in May.  Yet homebuilders are one of the weakest groups today.

Asian markets were down sharply overnight, as a liquidity crunch developed in China but the central bank did not step in to provide liquidity.  Reports indicate overnight repo rates spiked as high as 25%.

Europe's markets are also lower.  Economic data showed the Eurozone manuf. PMI rose to 48.7 from 48.3 and the services PMI rose to 48.6 from 47.2.  So those surveys are showing modest improvement even as they remain below 50 which markets overall contraction.

The dollar is higher as interest rates rise.  The Yen is lower, but folks seem to have forgotten about their Yen worries for now.  Commodities are lower, with gold prices falling below $1300.  Gold seems to have lost its safe haven status that folks used to go to in times of market stress.  Oil prices have fallen back to $95.50.

The volatility index is spiking 16% higher today to 19.30 currently.  This is the highest level we have seen so far in 2013.  The fact that the VIX couldn't get back below 15 recently may have been a sign that higher volatility was in store for the markets.

Trading comment: A couple of days ago we were writing about the positive resolution to the short-term double bottom pattern in the S&P 500.  I didn't think we would see this big of a freak out to the FOMC statement.  But as you know, anything can happen in the markets.  The SPX is back to testing that 1600 level that has held recently.  If it holds again, we could see more of a bounce into quarter end.  This has been our operating thesis as underperforming funds look to chase performance.  We thought this could lead to a short-term top in early July and a larger summer correction.  But it is possible that we have seen the highs in the market so far and said correction may be starting a little earlier.  We would watch the 50-day moving averages for clues.  If the SPX can't get back above its 50-day average soon, then we would look to get more defensive as lower levels might be in the cards.