Friday night the news hit of the S&P’s downgrade of the United States. Futures opened up down more than two percent as fear over a credit downgrade gripped the market. Without any help from economic releases sellers ruled the day. There was a glimmer of hope intraday, but it quickly faded as sellers continued to pound the market. Even President Obama could not calm the fears and only accelerated the losses. Volume was absolutely GIGANTIC as institutions continue to dump stock across the board. By the close sellers couldn’t get out the door fast enough and pushed to the lows of the session.
We have, for quite some time been super negative on the market. Market leaders were acting the wrong way and we had built up quite a bit of distribution over a few months. It is never a good sign to see a culmination of distribution and a lack of leadership. The market is very oversold at this point in time and being in cash is an acceptable position. Going short here is not a high probability play here. We may go down another 5-10% here, but given bear markets there can and will be violent snap back rallies. At some point, when we see a low here the market will move back and retest the low. Until then, it is going to take time to repair any possible longs here.
On the bright side the side crude oil has fallen more than 15% over the past few days. While it won’t translate at the pump as we are seeing the price falling in the future pits it will nonetheless drop the price at the pump. All commodities have taken a hit and as the decline in prices work their way back into the market it will help those who are struggling. Declining asset prices are not a bad thing, they are a bad thing for those with assets. However, when food prices drop it helps out the poor and middle class. The recent spike in commodities have squeezed the poor, a reprieve in prices is a good thing.
We’ll continue to wait out the storm and scan for potential short candidates. For now, the short side is more than likely overdone with little downside left (famous last words) and the long side has suffered too much damage. Stay patient and wait for the opportunity to strike!
