S/P- 65% Off Yearly Highs. Global Markets Now In The Red YTD

Asian and European equity index have given back all of 2010 gains in the Tuesday sell-off, while the S/P has a taken a 65% reduction in its year-to-date gains, that were shed in three sessions of trade. In all, it goes to show how unstable the stair-step moves higher on very low volume in 2010 were, and how dangerous those lightweight moves are when support areas need to be tested.
We stated in April that forex charts had the look and feel of the sub-prime and credit crisis era. The increasing volatility in the 'one-day-up and one-day-down' moves that made and lost a year’s worth of gains in quick time are confirming a lack of leverage, lack of access to inter-bank margin, and more importantly maybe, a need now to find yield returns outside of equity markets.
Investors are absorbing the ultimate in stair-step up/elevator down moves that have wiped out equity index stop loss areas that now will take time to reset. The impact in forex trade has been to see Usd strength across the board as trade desks get long dollar-based Treasury notes, and liquidate long-equity positions. The move to Treasury notes pays out an average 3% a year, a humble amount, but none the less obviously an attractive enough return for investors to liquidate stocks, and run for the safety of Usd notes.
The Wall Street rally on Monday, that added nearly 2% after Warren Buffet talked up his investment in Goldman Sachs, has been wiped out in quick time on Tuesday. However, the initial overnight moves lower in Asian and European trade looked no different to any other day that traders have seen in all of April. The variable on Tuesday seemed to be that certain price points were taken in the European banking sector that obviously were set on low volume on the way up.
The main European banks dropped an average of 5% today, and were instrumental in triggering a slow and steady market-wide sell-off that allowed no chance of the typical relief rally to form. The increasing volume in getting out of positions, compared to the volume as trades were built over the last four months, was dramatic, and shows once again the danger of going higher on light volume.
Euro-zone fiscal worries have built to the degree that they now seem to rival the infamous Bear Stearns, Lehman Bros, Credit Crisis, and Dubai World headlines that created doubts in regard to the safety of each one’s ability to pull through. Some survived, and some did not, but there is no getting away from the fact that this current period of trade has a similar profile.
The question marks now hanging over fiscal policies overseas have allowed the Usd to gain an average 1% in Tuesday trade, but important to note is the fact that only one of the major pairs was able to break past support 2 or resistance 2 on the daily swing points. That much of a dollar index percentage gain would normally see the majority of pairs testing support or resistance 3 price points. That signals that a near-term reversal of Usd buying may happen ahead of the Asian session.
Whether this latest equity move will be as contagious as its predecessors, or whether the low-volume bulls find a way to once again reverse the reversal is yet to be confirmed. If equities move the S/P index off the current 1165 support, and manage to get anywhere close to 1175 or 1185 in near-term trade, the Usd will very likely be giving back the gains seen against Cad, Aud, Gbp, and will continue its long moves against Jpy, while Eur and Chf remain at the beck and call of sovereign investor sentiment.
Forex traders have seen a move unfold on Tuesday that could easily have been replicated on any given day in April, but unlike previous attempts, the perfect storm of headlines, sound-bites price point, and a surge of well timed volume came together on Tuesday to allow the drop to hold. The Japanese markets return from a five day bank holiday weekend tonight, and that should mix up the volatility even further.