Breakout

Stocks Slammed! It’s Not Just Because of Syria

Jeff Macke
Breakout

At this point it's all but impossible to tell if the stock market's weakness is really all about Syria or of a dimming economic picture, potential disruption at the FOMC, or simple summer drifting. All traders can say for certain is the sell-off got much more interesting when the S&P 500 (^GSPC) lost over 1.5% and the NASDAQ (^IXIC) dropped more than 2% yesterday.

Since closing at a record high near 1,710 on August 2nd, the S&P 500 has lost 4.6%. The Dow Jones Industrial Average (^DJI) has dropped 5.6% in the same period. It's still a long way from the 10% loss required to fit the "official" definition of a correction, but anything more than 5% demands some attention.

To be sure the news flow has been disappointing. Despite decent economic data, the retailers reporting earnings over the last 2 weeks suggest Americans are reducing their spending. When Walmart (WMT) and Target (TGT) both miss earnings estimates and guide lower it's a bad sign. This is America. If we aren't spending money something is very, very wrong.

Related: Durable Goods Miss! Time for Bears to Put Up or Shut Up

"It's Syria," is a pat explanation for caution but in terms of stocks it's far too simple. Traders play the odds. Based on prior international incidents the chances are good that the U.S. will lob a few token cruise missiles into Syria then back off. From a pure trading perspective Syria is a chance to buy the dips, not knowing the name of the next Fed chairman is reason to sell and hide. (In the real world Syria is much, much more important but we're talking money here).

Michael Cuggino of the Permanent Portfolio Family of Funds says there's not much to worry about, at least in terms of what the Fed is doing. The taper talk is hype from his perspective. It's not what particular tool the Fed is using; just knowing the Fed will be involved is sufficient proof that nothing has changed in regards to monetary policy.

Related: No Fed Taper Until New Year Means New Highs: Fahmy

The subtextual issue under all the Fed speak is that the FOMC is facing artificial deadlines in terms of timing when if anything the data has gotten slightly worse economically. Whether you regard QE as a triumph of creativity and genius, or an unprecedented folly, at least it's a known entity. With Bernanke's term coming to an end early next year, and the White House making noise about giving Larry Summers the nod to be the next Fed Chair, it would seem all bets are off regarding monetary policy.

In other words it's not about tapering, but about removing the markets' confidence that Bernanke would be "creative" in regards to dumping money into the system. The devil we know may be better than the surly academician we don't.

Then again, maybe this selling pressure is simply a reflection of a rally badly in need of a breather after 10-months of sprinting. We'll have a better read on how serious the market is about correcting next week when the grown ups get back from vacation.

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