The S&P500 extended its pullback off of the 1,422 to 4.5% as the bearish stars aligned on a “glass half empty” kind of trading day. The VIX broke above 20 for the first time since early March as yields on Spain’s 10 year bond continued to rise and are nearly at 6% now. In addition, copper slumped to close at its lowest level since January as it broke below what had been a key support level around $3.70. As damning as the market might look, we have seen this movie before.
The way it begins is with a sell off from highs, usually because of rising bond yields out of Europe. We saw this playing out towards the end of March:
“Europe has quietly drifted to the background with the supposed “resolution” to the Greek debt crisis and markets bullying higher even with debt crisis “solution” set backs along way. A concern we have, not a huge one, but one nonetheless is the recent action in a the bond yields of a key European nation.
Spain, regarded as one of the debt-ridden PIIGS (Portugal, Ireland, Italy, Greece, Spain) has seen their 10 year bond yields do something that was all too common throughout the fall of 2011: rise. The yield rose 3.3% on Wednesday and is now yielding 5.4%. The 10 year Spanish yield hasn’t been above 5.5% in a couple of months, and hasn’t passed 5.7% all year, but that looks like it could be changing soon.
We’re not telling everyone that another Euro debt crisis is coming but with the market elevated at 4 year highs and looking exhausted, Spanish yields rising could be the excuse the market needs to pullback…”
-SH @ the bell 3/22/12
The middle of the movie brings about panic amid rising volatility, we’ve seen those scenes acted out in a role worthy of an oscar the last couple of days. The question is will the ending we have become so used to, you know the one where you get rewarded for buying the dip that the panic brings, play out again? While that answer is unknown until it becomes known, we do some light at the end of the tunnel.
First of all, with earnings due from companies like Google, Apple, J.P. Morgan, & Alcoa due out over the coming days the focus might shift from Europe to our domestic companies earnings. The key is that the focus shifts for a good reason and not a negative compounding one. We need these earnings reports to come in above expectations from broad sectors, not just the likes of AAPL. If they do not, they will only add logs to the bearish fire and this 4.5% pullback could turn into a 10% correction or possibly more.
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