All three major indices ended this Tuesday sharply lower with Nasdaq now down 8 sessions in a row. The market stayed in the positive territory until 90 minutes before the close when a wave of selling in the financial sector pushed Dow down by more than 250 points. After today’s decline, all three indices are in the official correction territory (defined as 10% decline from previous peak). VIX Index did jump by almost 10% in the last 60 minutes but the closing value of 25.58 was still not high enough to indicate a bottom. It seems that just like many previous financial crisis, the market needs some scapegoats before it can move materially higher. The most obvious candidates can be found in the financial sector and the list includes the largest mortgage underwriter CountryWide Financial (CFC), ETrade Financials (ETFC) and the largest bond insurer MBIA (MBI). If any of these top candidates goes under, chances are the Fed may take an inter-meeting emergency rate cut along with addition steps to calm the market and this may become a trigger for the market to move higher. Although this is a pure speculation, the chance of it happening is clearly increasing. The market internals just kept deteriorating with close to 900 stocks hitting their 52 week lows today. Gold price hits another record high and now is above $880 as investors are hedging against higher inflation. Both Philadelphia Fed President and Boston Fed President showed willingness to cut rates further if the economy growth is in jeopardy. Currently the market is betting almost 70% chance of 50bps interest rate cut in the next Fed meeting vs. 30% chance of a 25 bps cut. Tomorrow we are going to get St. Louis Fed President Poole to speak about the economy.
