Monday’s action in the SPX was not very constructive, as choppy trading gave way to a sharp move down at the close – the opposite of the strong closes we saw during the rally. Tuesday opened with a gap down, and was below the Feb. 8th closing low for the year, as the NYSE invoked Rule 48 for the second time in just over a week. If the day’s action cannot close above that mark, an important near term support point will have been violated. That, my friends, would not be a good sign at all for stocks.
[UPDATE: the previous SPX low held today, as the price action rose through the afternoon into the close, and it formed a “hammer” candlestick pattern on the daily chart – this is a positive signal for the stock market finding short term support here. Now we’ll look for confirmation.]
The news flow is just ugly, and the very nervous financial markets are responding as we might expect: the US Dollar and Treasuries are rallying while most everything else fades. This is not the sort of action that could continue indefinitely, but there can be a lot of damage before the market stabilizes. Global markets are putting in a series of lower highs and lower lows, so (unless you are a tactical trader) there is nothing to do at this point but stay out of the way.
In the longer term – and returning to our inflation vs. deflation theme – the discussion about a Japan-style deflationary trap gripping the global economy has picked up, as the events in Europe unfold. For those who want to really understand the dynamics of deflation, MIT has a number of Paul Krugman’s papers posted. They aren’t easy to read, but will reward patient study. See here, here, and here. Also consider the Bloomberg article by the ever insightful Michael Pettis.
If getting the inflation vs. deflation picture right really is the most important macro portfolio strategy call we will ever make, then we should make every effort to understand what is going on here.