A U.S. Downgrade Perpetuates Global Sell-off
The market had a productive day on Friday. Although the indices declined, many rebounded from over 2% down during the afternoon and closed near even. Volume was jacked during Friday's day of indecision, and it appeared as though the bulls had stolen some of the bears momentum.
Then, after the market closed on Friday, the analysts at S&P dropped a nuclear bomb on the market. Late Friday night, S&P lowered the U.S. credit rating from AAA.
Any stability the market achieved on Friday is gone. The downgrade of U.S. debt is an event many market participants were unprepared for. And just as investors were beginning to nibble at risky assets again, the downgrade will result in another leg lower for stocks and commodities as investors flee to safety assets: gold, Treasuries, or the Swiss franc.
In months past, big technology stocks like Apple (Nasdaq: AAPL), Netflix (Nasdaq: NFLX) and F5 (Nasdaq: FFIV) provided safety during harsh market pull-backs. But in this bearish move, all stocks have been prone to weakness, and there has been no shelter from the market decline.
The market is poised to open lower today. If you can push your way into a trade and get a short position early, then do it. But more than likely, the indices are going to gap-down over 2%. And the decline will not be tradable.
At that point, many people will pile into the shorts, or puts, with the mindset that the market is headed lower. But I would advise that you do not get overly short just yet.
While a new bear trend is very likely underway, the market already declined by more than 10% in the past two weeks. The descent has left the indices trading in oversold extreme areas not seen since the bear market of 2008. And the indices are currently more oversold than they were in the flash crash of 2010 and the March low of 2009. The indices can trade at extreme levels for a time, but I think the large move to the downside has passed and there remains only a few percentage points left to go.
The downgrade over the weekend came ahead of an FOMC meeting this week. Although the Fed is unlikely to raise interest rates, it will be interesting to find out if the committee discussed how the recent downgrade impacts future policy decisions. Earnings and economic data are mild this week, but the vibrations of the downgrade will resonate for a few days.
