Day Traders Diary


The market remains under heavy pressure today, with the Dow -500 pts (-4.4%), S&P 500 -67 (-5.6%) and the Nasdaq Comp -150 (-5.9%). The surging VIX (+39% today) illustrates a growing sense of panic, and now prices in a +/- 2.8% daily move in the broad market (the VIX looks at volatility expectations that cover the next 30 days; the 2.8% move is a one standard deviation daily move, which can be expected to happen about 2/3 of the time). While the market has bounced off the lows here, we haven't seen any sustainable bounce manage to hold all day.

The S&P 500 is now -16% over 11 days, representing a relentless period of selling in the broad market. Deleveraging is picking up as hedge funds sell losing positions, which often exacerbates pressure in less-liquid securities that they typically look to capture a liquidity premium in. Financials are extremely weak (XLF -8.1%), as names like BAC (-18%), C (-16.%) and MS (-13.4%) plummet.

Also, today's action can be viewed as much more than a response to the S&P downgrade. While the S&P downgrade added some bad news to an already fragile market, it didn't bring about any new revelations about the state of the U.S. fiscal situation. Instead, the action in equities can be viewed as a downgrade of the U.S. and global economic outlook, doubt about the flexibility of the U.S. to deal with a weaker economy and the spillover effects from Europe, and a general sense of fear about the uncertainty that encompasses all of that. While most would agree the market is oversold on a near-term basis, such extreme volatility and fear makes it extremely difficult to gauge how things will play out over the coming days.

We do know that the FOMC is due out with their latest policy statement tomorrow, which could include language that addresses the recent volatility in the market. Although most still don't expect anything in the form of a QE3, the Fed could display some confidence about its ability to act, if needed. Prior to the Fed however, participants will be watching European markets for further signs of stress.

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