What's Behind the Selloff: Panic Is Turning to Despair
NORTH AMERICA, STOCK MARKET, EARNINGS, TOBACCO, PHARMACEUTICALS,
CNBC.com
| 24 Oct 2008 | 11:49 AM ET
After being in panic mode the past few weeks, investors are now wallowing in
despair.
Stock
markets tumbled around the world Friday as investors moved to liquidate
risky positions. Mounting evidence of a global recession, born of the
worst financial crisis in 80 years, kept most markets volatile.
US stock indexes fell around 4 percent, though not as much as feared earlier in
the day when futures hit their limit down. European stocks tumbled 6.5 percent
and Japan's Nikkei plunged 9.6 percent.
The US dollar surged to fresh two-year peaks versus a basket of currencies as
dismal economic data from Europe heightens fears of recession.
The
yen soared to multiyear highs versus dollar and euro on ensuing risk
aversion, while British pound suffers biggest one-day drop against U.S.
currency since September 1992, according to Reuters data.
Oil plummeted more than 7 percent to less than $63 per barrel, while
commodities from copper to zinc, sugar and coffee were battered by sharp
selling.
“The
market in general is people throwing in the towel,” says Michael Cohn,
chief market strategist at Atlantis Asset Management. “Bear markets go
from denial to panic to despair, and we’re at the despair point, which
I’m hoping is the last of the stages.”
What's
behind the selloff? Investors around the world are ignoring the good
news and focusing on the bad. And there's plenty of that to go around.
Amid all the gloomy economic data and disappointing earnings,
economists and market pros are increasingly convinced that the US and
the rest of the world are headed for a painful recession.
For Investors
* Today's Market: What the Experts Are Saying
* Forget About Staying on the Sidelines
* Cramer Explains Market's Wild Fluctuations
* Market Psychologist: Cooler Heads Must Prevail
* 'Sell and Get Out of the Way'
* Why Emerging Markets Are Caught in Crisis
* Crescenzi: The Big Questions Now
* Credit Spreads and Libor Data
“We’re
so deeply oversold I would think the market would start to recover and
rebound pretty significantly,” says Chip Hanlon, president of Delta
Global Advisors. “But I think the market’s deciding that this is going
to be a prolonged and painful recession. I think that’s a fair
conclusion, so were getting these fits and starts.”
To be sure, a handful of the companies that posted strong earnings have seen
their shares enjoy mild rallies. But most are like McDonald’s ,
which beat analyst estimates for the quarter and then watched its stock
fall after a downbeat forecast for the rest of the year.
“Even
if they report good numbers, it’s the guidance going forward,” Cohn
says. “As a CEO in this type of environment, if you paint a rosy
picture going forward you’re going to be thrown in jail.”
Another reason stocks can't hold rallies is that there is substantial selling
pressure from hedge funds facing redemptions.
Making sense of this market. Watch video at left.
Hundreds,
perhaps thousands, of the investment pools are expected to drown this
year as they face intense pressure to unwind before the end of their
fiscal year on Oct. 31.
“There’s
nobody on the other side of these trades,” Michael Kresh, president of
M.D. Kresh Financial Services, says of the hedge fund situation. “The
reality is there’s nobody willing to come up to the plate and buy until
they feel this is all over...Every time we get a nice up trade there’s
a possibility that somebody needs to liquidate and they’re liquidating
toward the end of that up day or the next day.”
That
was in evidence in each of the past two weeks, when Mondays brought
strong moves higher in stocks that eroded as the weeks went on.
Fear-buying has been substantial, with the Volatility Index moving into
uncharted waters, while bad earnings reports have served to
undercut rallies and strong earnings have had little impact..
“It’s
nothing to do with what we’re seeing in earnings,” Kresh says.“What
we’re seeing is a standard pattern. If you take financials out of the
picture, most companies are meeting or exceeding earnings expectations.
But it doesn’t seem to help. Fear is the primary driver here.”
Once
the hedge fund situation unwinds, there will be clearer picture of
exactly how deep a problem the recession will pose, Kresh says. Cohn,
meanwhile, is awaiting the impact of the government’s additional
stimulus efforts.
Hanlon is making tepid moves at buying into the weakness, using exchange-traded
funds like the ProShares Ultra Small Cap and the ProShares Trust Ultra QQQ .
The SAA moves up 2 percent for each 1 percent gain in small gaps,
while the QLD gets the same return for a move higher in the Nasdaq.
Hanlon bought both funds with fairly strict stops put in to guard against steep
drops.
“I’m
in the camp that believes we can get (a rally) at any time,” he says.
“I’m trading on the long side, but not with any conviction.”
© 2008 CNBC.com
URL: http://www.cnbc.com/id/27358542/
________________________________
Privacy Policy .. Terms of Service© 2008 CNBC.com
