Relief Selling

Equity and commodity bulls are finding this morning’s trade hard to swallow.  Thirty minutes into the trading day, the S&P 500 is down 1.35% to 1,168.72, crude oil has fallen 2.80% to $80.75/barrel, and gold bullion prices have fallen 2.78% to $1,333.90/troy oz.  Earnings reports from Apple, IBM, and Bank of America have been received in a fairly negative manner, which is putting pressure on share prices.  Also, comments from Treasury Secretary Tim Geithner overnight defending the value of the greenback have spurred the U.S. Dollar Index higher by 1.40%, thereby adding additional selling pressure to most asset classes.  This is the type of development I’ve been looking and waiting for.

And while I have been looking for a pullback in the equity markets and gold for a few weeks now, I’m not yet ready to declare vindication just yet.  As the old adage goes, “One day does not make a trend.”  The obvious implication of this saying is that lots of things can happen on a day to day basis.  It’s the market’s willingness to move in one direction over an extended period of time that truly denotes a trend.  Numerous times over the past month we’ve seen markets pull back early in the session only to close unchanged or higher for the day.  However, if this tendency can be overcome today, this will go a long way towards proving the market is, in fact, vulnerable to a sustained correction.

With such a sharp pullback in place so far today, it’s interesting to see that the Treasury market is seeing yields climb.  In a normal environment (Yes, there are a lot of abnormal things in the Treasury market at present), you would expect to see investors rotating funds to the Treasury market as a means of protecting assets.  Clearly, this is not the case today, which brings into question my supposition that Treasuries will see significant buying if/when the equity markets drop.  Again, one day does not make a trend, but this is yet another case of the equity and debt markets moving in tandem with each other, which is a somewhat concerning development and a testament to the ancillary effects of the anticipated Federal Reserve interventions. 

As was the case yesterday, I’ll be watching the price action of the U.S. Dollar and gold closely again today.  Both have seen intraday trends of late that were not sustained, so the ability of the bears to follow through for an entire session will be quite important.  Also, if Treasuries end up finding a sustained bid for the day, this would be yet another sign that challenges are looming for most risk-based asset classes.  Definitely lots to keep an eye on, but, thankfully, it makes for an interesting trading day. 

Until later.....