Friday, June 21, 2013

Searching For Support

The market really took it on the chin yesterday following the selloff that began on Wednesday after the FOMC meeting.  Yields started to move higher on Wednesday and that will likely be viewed as the catalyst for the selloff.  But there were other things going on in the global markets that may have exacerbated the selling.

For one, there was a huge liquidity crunch in China.  China is an important market and we know that in today's global markets a liquidity crunch in one region has a way of reverberating through the markets.  So when short-term rates spiked to crazy levels in China and the central bank didn't step in to provide any liquidity, that likely spurred concern among investors.

There is also the ongoing issues in Greece.  We haven't heard much about Greece in the headlines lately, but the reports that the IMF will suspend aid to Greece if the country doesn't plug its budget gap could be rekindling fears of what transpired last summer.

Our markets did open higher this morning.  There were reports that the Peoples Bank of China finally stepped in to inject $8 billion into the system.  China's overnight rate (SHIBOR) eased back to 8.49%.  It had been as high as 25%.  But after an early bounce, sellers surfaced again and the major indexes are back in the red as of this post.

Asian markets were mixed overnight.  Japan was higher, but most markets were lower though not as bad as the US yesterday.  Europe's markets are mixed today.

The rise in the 10-year yield has certainly been disconcerting.  Any sort of income oriented stock sold off very hard yesterday (REITs, utilities, etc).   The 10-year yield traded north of the 2.40% resistance level that has held for the last 18 months.  Today it is rising further and touching 2.48% currently.  Some bond strategists like Jeffrey Gundlach have cited the 2.50% level as a new ceiling.  We shall see.

The dollar is higher again today.  It has been rising along with interest rates.  Commodities are mostly higher.  Gold is higher to $1291 after a big plunge yesterday.  Silver and copper prices are higher as well.  But oil is a bit weaker to $93.80.

And the volatility index which showed a huge spike higher yesterday is down slightly, but still high at the 20.0 level.  That indicates expectations for continued high volatility in the very short term.

Trading comment: It certainly seems like the combination of high volume selling, the spike in the volatility index, and the sharp rise in interest rates is ushering in the long awaited market correction that folks have been talking about.  Most people said they wanted to wait for said correction to do some buying, but now that it is at hand we will see where their conviction level is.  I could still see one more push higher before quarter end in some window dressing attempt.  But we have been saying that into that scenario we would look to get more defensive for a potential summer correction.  So far the SPX is -6.0% off its May highs.


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