Market Sinks as Europe, Sequester Worries Intensify

Marc Sperling
February 25, 2013

US markets today saw their sharpest decline since November amid worries over the Italian elections and looming sequester. Traders were somewhat surprised when they walked in this morning by the pace and strength of the bounce from Thursday's lows, but the picture markedly changed as today's session wore on. The Euro and markets were spooked today by a surprisingly strong performance in Italian elections today by Silvio Berlusconi's anti-austerity coalition. In addition, US investors are starting to fret more openly about the automatic spending cuts set to take effect on March 1, known as sequestration. The S&P 500 finished the day down 1.83%.

Markets showed their first signs of fragility in 2013 last week during a two-day pullback that took the S&P down through its 8- and 21-day moving averages. The dip appeared to be short lived, as stocks recouped most of those losses during Friday's rally and today's higher open. The positive pre-market undertones today, though, quickly dissipated after the open as indications from Italy showed surprising results for the former Prime Ministers coalition party, a development that could rock the boat as Europe tries to steady its ship.

The S&P gave up all of those pre-market gains just more than one hour into the session, with the sell-off continuing all day and accelerating into the close. The index closed on the dead lows at 1488, well below Thursday's low. With no short-term support level in sight, and it feels like we could get a test of the 50-day MA, which currently stands around 1476. The VIX today jumped 35% as this sleepy market woke up in a night terror.

We don't often discuss currencies at T3Live, but its important, no matter what asset you trade, to understand some of the dynamics at work. The Japanese Yen has been getting sold off hard since October, but today erupted off lows due to the Italy-driven weakness in the Euro. It will be interesting to watch whether that trend continues.

When you have macro concerns weighing on the market like we saw today, the baby goes out with the bath water. But that doesn't mean there weren't technical signs early in the session that the market wasn't completely healthy. The financials have been a leading group in this market since mid-November, and shown impressive resilience at each sign of trouble from the indices. Today, though, the Financial Sector SPDR ETF (XLF) filled its gap before the broader market and showed signs it may not hold up this time around. The banking sector, and Goldman Sachs (GS) in particular, has always shown particular sensitivity to the European debt crisis, and that held true today. The XLF closed the day down 2.65%, while GS plummeted 4.16%.

Again, when you have macro catalysts driving the price action, you often see stocks remain more highly correlated. In these types of environments, narrow your scope and focus on identifying potential inflection points in major indices. During corrective phases, if you are looking to buy dips, focus on stocks that have been leading, like Google (GOOG) and LinkedIn (LNKD), for example.

If you are not already a subscriber, I would recommend taking a free trial to our Virtual Trading Floor(R) this week, where you can follow our long and short positions as they update in real-time. Market waters had been fairly calm in 2013 prior to today, but with these potential catalysts, volatility could be here to stay for a week-long visit, at minimum. I believe it's invaluable at times like this to have at your disposal the calming of influence and discerning eyes of traders who have been through almost every type of market cycle in the past 10-15 years.

*DISCLOSURES: Marc Sperling is long VXX, DDD, FB, SSYS, ANTH, SHOS, AAPL, XONE. Long calls in the following stocks: DRYS, S, F, FB, LEN, ZNGA, VXX, RYL, UA, BBRY, DDD, GNRC, DECK, TBT, WDAY, PANW, AAPL, CMG. Short SOWR, YCS.