Market Wake-Up Call

David Fry's picture

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For the last two months I've been saying that markets have become accident prone given the combination of
overbought conditions and ultra-light volume. One of those weekend-based news dumps caught in the sift was
from Cyprus, an "accident-like" event that triggered some serious selling in equity markets.
 
Obviously an EU tax or even some would argue a theft in the night, on bank deposits didn’t play well with savers.
Goldman Sachs (GS) even chimed-in before the open stating this decision set a bad precedent for resolving debt
issues in the eurozone. Some were suggesting southern European country depositors should move their deposits
to the UK.
 
Since the trial balloon didn’t go over well there was some back peddling by authorities first with Cyprus declaring
a bank holiday until Thursday. Not so curiously, Russia intervened denouncing the tax as a poor way of doing
business. But, as this article reports, the country’s banks are loaded with money-laundered deposits from
Russians.  So, it seems Mr. Putin wants the EU to bailout Cyprus and his pals at the same time giving Russia
a free ride.
 
The only U.S. economic news Monday was the Housing Market Index which was a disappointment (44 vs 47
exp & prior 46). Apple (AAPL) was once again in the news with rumors the company will raise the dividend by
50%.
 
As suggested, stocks gapped open lower but then rallied with the DJIA turning green briefly as dip buyers
appeared. Stocks then turned lower again to close with losses, with the leaders losing roughly .50%. Those
leaders were in financials (XLF), down .80% on fear of Cyprus contagion (How would we cleverly add a “C” to
PIIGS? Someone please help with this.). The dollar (UUP), bonds (TLT) and gold (GLD) all rallied on a flight to
safety. Commodities (DBC) overall were weaker led by oil (USO), base metals (DBB) and agriculture (DBA).
 
Overseas markets were lower again, from Cyprus naturally, while China (GXC) announced more property curbs.
 
Most investors are nervous now and need to hold things together to include the Fed meeting announcement
Wednesday. If bulls are lucky they’ll get their Turnaround Tuesday.   
 
For all this volatility and fear, volume was unremarkable and breadth per the WSJ was negative.
 
3-18-2013 5-22-00 PM diary

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The NYMO is a market breadth indicator that is based on the difference between the number of advancing

and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth

indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major

trends. I believe readings of +1000/-1000 reveal markets as much extended.

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own
interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day
period. Greater buying of put options (protection) causes the index to rise.
 
Perhaps bulls will get lucky and get their Turnaround Tuesday. The only economic data will be from Housing
Starts with 919K expected.
 
The latest news from the rapidly evolving situation was this via Reuters: “Cyprus to introduce "more progressivity"
in terms of deposit levy terms: Eurogroup statement” That’s not very reassuring frankly and whoever came up with
this theft ought to change their mind quickly.
 
Let’s see what happens.