What Just Happened?

Whew! What a day in the markets. The given, if not official story is that a “fat fingered” trade on Procter & Gamble shares was the catalyst for a near 1,000 point free-fall in the Dow. The program trades took over and the rest is printed on the charts. Some of you will remember the crash of 1987, also blamed on the computers. Uh huh, a typo that swung many billions in market value in a matter of minutes? The more conspiratorially minded will see darker actions behind this.

Either way, it doesn’t matter much. Risk assets across the board continued to receive the type of beating they’ve been getting for more than a week: West Texas crude, silver, real estate trusts, bank stocks, emerging market shares. Name your favorite, they were all pounded. Treasury bond shorts were crushed. Breadth was overwhelmingly negative. The handful of readers of this blog have known that we’ve been urging extra caution and playing defense for weeks now. The warning signals were flashing all over the place, and we noted the extended low volume rally and the days of distribution in the market. Hopefully none of you were really hurt.

What now? The S&P 500, having just violated the 50 day SMA this week, punched way down through the 2oo day before recovering,  yet still closed down more than 3%. Short term, the market is oversold. Fridays have been volatile, and tomorrow will be interesting. The most likely scenario: we will get a bounce and try to rally back up to the recent highs, stall out in the 1,200 range on the SPX, and then build up for the next directional move. If we can’t get a decent bounce here and continue to deteriorate, that would be a very bearish sign.

This market just hasn’t been acting right. We’re positioned defensively, underweight stocks, heavily in cash, and long the US Dollar and long term Treasury bonds – positions we’ve been building since last fall. We’ve had a nice run in stocks; it was time to take chips off the table. You can’t go broke taking your gains. As the venerable Richard Russell said the other day, this is no time to be cute.

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