Wednesday, March 16, 2011

Fear Trumps Greed for a Day

As has been reported here over the past couple of days especially and for the better part of the past month, US stocks are heading lower.

Today's action was in stark contrast to the dip and rally from Tuesday, as news coming out of Japan just continues to worsen, as most thinking people assumed it would. Without going into the gory details, it appears that the nuclear plant that has been a problem since Friday's earthquake/tsunami is headed toward at least partial meltdown and at worst total meltdown.

Making matters even more horrifying is that there are six reactors at the site. Up until now, only four of the six reactors at the Fukushima Daiichi site have been affected, with all four of them spewing radioactive material at some time or another over the past five days, though it now appears that reactors #5 and #6 are at risk as well.

Information from the site has been sketchy at times, contradictory at others, but confusing and increasingly worse all along. It appears that the Japanese people are in for a long period of pain and suffering, and the implications are likely to be felt worldwide.

On Wall Street, where bulls ignore the obvious and bears hope against the worst, but bet on it, stocks were down in the early going until just before 11:00 am EDT, when news came, via a government official, that the situation at the plant had worsened considerably. That sent stocks into an absolute tailspin, with a full 1% decline within minutes of the news.

A rally was attempted when stocks hit their lows of the day at 2:00 pm, but it sputtered badly and the markets stared grimly at one of the largest one-day losses of the past two years.

Dow 11,613.30, -242.12 (2.04%)
NASDAQ 2,616.82, -50.51 (1.89%)
S&P 500 1,256.88, -24.99 (1.95%)
NYSE Composite 7,929.87, -162.24 (2.00%)

Confirming the carnage suggested by the headline numbers, declining issues battered advancers, 4889-1704. It's amazing it wasn't even more lopsided. Our leading current indicator has finally offered confirmation of a directional trend. New highs on the NASDAQ numbered 31, new lows, 74. On the NYSE, 31 new highs and 38 new lows. That makes five straight days on the NASDAQ that new lows have outnumbered new highs and three out of five on the NYSE.

If anyone's been waiting for indicators to flash red with sirens blaring, today was it. Japan's woes will continue to dominate the news for the foreseeable future and the associated supply chain issues of a globalized economy are beginning to come to light. Shipments of crucial parts are going to be delayed or stopped, trade will suffer and a large chunk of the world's third largest economy is going off-line for a while. Whether that is going to be weeks or months or years is still unknown, but the betting is that disruptions will extend through at least the end of the summer.

Another tell-tale sign that today was a day of capitulation by the bulls in US stocks was told by the off-the-charts volume in today's trading. It was the largest volume day of 2011 and may still be dwarfed by the eventual follow-on decline. One caveat is that the Fed continues its abuse of the US dollar by printing more of them at every opportunity. A decline in US stock markets will only trigger more printing, more inflation and an even more unbalanced global economy, one that was already teetering on the brink of disaster, even before the Japan debacle. However, such an inordinate infusion of capital may cause a snapback rally at any time. If such occurs, it will be easy to spot, as it will be sharp and large. The other characteristic of such an event is that it will have a relatively short duration - an afternoon, a day, a session and part of another, at most.

NASDAQ Volume 2,596,625,000
NYSE Volume 6,569,946,500

Commodities caught some bids, as sellers of equities rushed to less-risky assets. Oil was up 80 cents, to $97.98 as conditions in the Middle East continue to rage on, unsettled. Gold gained $3.30, to $1,396.10, and silver was up 36 cents, to $34.47. The move in precious metals is particularly interesting as it is a break-away from equities. Tuesday, all assets fell in a rush to liquidity. Today, the players were placing bets: for precious metals and other valuable commodities and against stocks and currencies.

Since there is no quick fix to nuclear accidents, especially those being mentioned alongside Chernobyl - the worst ever - don't expect the plant in question in Japan to be repaired for some time, if ever. Officials are only now poring over whether to entomb the reactors with heavy doses of cement or continue containment efforts, which are not working very well at present.

At this point, any intelligent human should take advantage of the short-term decline in the precious metals, but also maintain a large sum of cash, outside of any investments. In a declining, deflationary event, which may be occurring at this very moment, cash will be king. In a complete rout of economy, society and civility, gold and silver will reign supreme. Both situations have great potential at the current time.

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