Considering the view of the carnage - it's just a matter of semantics for the pundits to debate the historic qualities of the Crash of 2011. For all intents and purposes - the dog days of summer's fat tail (see Here) came swinging and crushed the markets in the past two weeks. Was it a flash crash? Certainly not, that would have been so blasé and last years fashion. The new black, is an orderly and cascading decline that erased more than 16% (as of last night) of the S&P 500 over a brisk 11 trading sessions. For the high beta names it was commensurately brutal with the Russell 2000 clipping its wings to the tune of 23% as of last check. Light sweet crude - over 18%. Germany (EWG) and Italy (EWI) - 23%. Spain (EWP) a nominal 19% haircut. Conversely, the safehavens of gold and US treasuries (UST) rose approximately 8% and 4%, respectfully. Riding the median, the US dollar and silver treaded water to the tune of +0.5% and -1.0%, respectfully.
So what can we make of these historic dislocations and movements in the markets?
To a certain degree the market is still following the echo of the summer of 1998 where sovereign debt issues destabilized the global markets and beckoned the age of constructive interference (moral hazard if you will) we now live with on a regular basis. Of course the difference this time around is the world economy is precariously skating on much thinner ice that many would argue is nothing more than a thawed liquidity trap - and the sovereign debt issues stemming from two of the largest economies, the US and the collective eurozone.
Eddy Elfenbein over at Crossing Wall Street has a good piece that neatly sums up the dynamic within the markets over the past few weeks:
..."Here's what's happening: The S&P downgrade of U.S. isn't so much impacting Treasury yields. Those are as popular as ever. Instead, what we're seeing is the impact on everything else. For example, the downgrade is leading investors to think that the government won't rely as heavily on fiscal policy to get the economy moving again. That implies that there will be more monetary accommodation from the Federal Reserve which means low rates for a longer time."
..."This year highlights an important fact about investing: The stock market is not symmetrical and it's subject to "fat tails." I'll explain that again but this time in English. The stock market has a tendency to rise slowly and fall back sharply. Bull markets are long and boring. Bear markets are quick and deadly. In fact, most of the debate about a bear market comes after the low. It moves so fast that folks don't realize its over."
Although the declines have been severe with terrifying velocity and volatility, I agree with Eddy's final point in the article that the market is in a panic mode - not on a trip back towards the March 2009 lows. What has complicated and added motivational propellant to the downside here is the timing overlap of economic data now revealing a moderating world economy. And while it would be foolish to discount those concerns with regards to the potential for another recession, I believe the ingredients for a sustained recovery are as present now (and perhaps much more so with cheaper input costs) as they were before the sovereign debt crisis erupted.
I believe in the days and weeks to come, we will hear similar reports like the one out of Reuters today describing BlackRock's initiative to scale out of their commodity and bond portfolio's into equities.
"A big thing for our global allocation fund will be as the market goes lower, we will be nibbling into the market each day. Our bonds and gold holdings will be doing well, but when we are rebalancing, we will be rebalancing into equities," Holt said.
..."As equities get cheaper and cheaper, the question is: As the fire is around you, do you want to take out more insurance, or do you want to start preparing for after the fire?," said Holt.
"I think that is the type of territory we are moving toward," he said. Reuters - BlackRock to use gold, bond profits to buy beaten down stocks, August 9, 2011
Getting back to the charts, here is an updated long term profile of the gold/silver ratio contrasting the movement in 1998 and today. To think that it was just last week that I had posted this chart with the SPX at 1286 certainly puts the decline in perspective.
The following two charts are of the Russell 2000 in 1998 and today. As in 1998, small caps took the brunt of losses in the severe decline. I believe the current market is trading around a short term low that will likely establish the bottom of the range for much of August. The 1998 market (Russell 2000) retraced approximately 38.2% of its decline before rolling over and making another low. If the lows of yesterday hold, my expectations are for the Russell to trade up to approximately 730 before retesting or making another low.