After having been frustrated mightily for the vast majority of the past nine months, the bears must be feeling pretty good right about now. And while the S&P is only off 2.8 percent from its Aug. 2 high, everybody, everywhere assumes that stocks are heading lower from here.
The excuses du jour for Thursday's rout in the stock market were many and varied. For starters, apparently Cisco Systems (CSCO), which is known for manufacturing earnings that impress by a penny or so, didn't have good things to say about the future after the close on Wednesday. Next, the yen-carry trade began heading the wrong direction overnight on concerns that corporate taxes in Japan won't be reformed after all. Then there was the Wal-Mart (WMT) report, which also raised some concern about the coming quarters. Next, the yield on the 10-year U.S. government bond spiked to a fresh high for the cycle.
The yield spike, the yen rally, and the guidance issues from two very big names were clearly the triggers for the selling on Thursday. And to be sure, there were algos chasing algos once the S&P's line in the sand at 1680 was breached. However, it is important to recognize that there are other big-picture worries out there as well. And the bottom line is the combination of the big-picture stuff and the near-term catalysts simply overwhelmed anybody interested in doing some bottom-fishing on Thursday.
Any time there is an important break in the market, it is important to understand why the move occurred. Yes, algos can certainly both create and reinforce a move. However, markets don't just dive 225 points just for the heck of it. No, there is usually a reason to be found for the move.
How long can Thursday's dive go? And for that question, the big picture needs to be examined.
The question for this morning is actually the title of this morning's missive: What does the market fear most? There are the usual suspects: China growth, the budget battle, Europe's banking system, the calendar, interest rates, valuations, the economy, the Middle East and the Fed. But in all honesty, with the exception of the renewed rate surge, nothing on this list was new. And as anyone who has been at this game a while knows, markets can deal with just about anything — as long as there are no big surprises.
Uncertainty is the real issue of the day. Uncertainty about what to expect going forward is the reason folks take profits, reduce risk, or decide to "go the other way" for a while. Uncertainty is what causes traders to say, "I've seen enough, the market can do its price discovery without me." And uncertainty winds up being the primary cause of the big declines.
The key question here is if there is enough uncertainty at the present time to turn a garden-variety pullback into a meaningful correction. Is fear of a "policy mistake" by the Fed enough to cause a decline of more than 5 percent? Is the uncertainty over when "the taper" might start significant enough? Will the unknown of how "the taper" might actually impact the markets do the trick? Can the concern about the lack of revenue growth morph into a focal point that keeps traders' attention for more than a day or two? And what about the bite that rising rates might have on the economy? Are any of these worries big enough to warrant another mid-year dance to the downside?
It is actually much more important to know what the questions are than the answers. This may be beating a dead horse here, the real question is what is the market worried about the most?
Frankly, this is one of those times when the tape may indeed tell all. Although most of Wall Street traders are at the beach with their kids, what the market does over the next week or two will likely answer some or all of the questions posed this fine Friday morning.