Posted | by David Moenning |
Did Something Just Crawl Out Of The Woodwork? image

And we're back... After months of little to no volatility, the bears got back into the game yesterday, putting on a pretty decent show on the first day of the week's trade.

Stocks started the day higher - no, make that, a lot higher - on the back of strong earnings from the likes of Citi (NYSE: C) and renewed enthusiasm for the economic picture. Before you could find a second cup of coffee, the venerable DJIA was up another 283 points and the floor traders had donned their Dow 26,000 hats. (And for the record, do we really need new hats for every 1,000 Dow points?)

All the major indices were following suit and it felt as if the melt-up was shifting into another gear. "Party on, Wayne" appeared to be the most appropriate phrase of the day as the S&P 500 broke through a big, round number of its own at 2,800.

But then it happened. While the Dow Jones Industrial Average help up fairly well, the rest of the indices started to decline in earnest. And after a modest period of waffling during the lunch hour, the S&P sank into the sunset into the close, finishing down nearly 10 points - and 31 points (1.1%) off the high. The NASDAQ fared worse and the small- and mid-cap indices wound up falling 0.75% and 1.28% respectively on the day.

The technicians - especially those dressed in their bear costumes - clamored about the session being a "key reversal" day, which, historically has meant there will be more selling ahead.

So what gives? Why did stocks go from bright green to red? Why the sudden change of heart?

In short, because this is what happens to markets that get ahead of themselves. Markets that move too far, too fast. Markets that are overvalued. And markets where everyone agrees the only way forward is higher.

As is usually the case, something crawls out of the woodwork to cause the fastest of the fast-money masters of the universe to question their thesis. Something that causes traders to do a double-take and utter the words, "Wait, what?"

In this case, that something is actually a couple things. First, there is the fact that the U.S. Government is facing the possibility of a shutdown at the end of this holiday-shortened week. And while most believe a deal will be made at the 11th, 12th, or 13th hour, the rhetoric out of D.C. is giving some investors pause.

Lest we forget, many a rally over the years has been ended by the childish gamesmanship that gets played out within the beltway.

But the real story of the day had to do with the decline in the dollar. Or, more accurately, the spike in the euro.

Cutting to the chase, the talk going around is that the Europeans will need to start putting the brakes on their QE game at some point soon. And the key is that "sometime" might be sooner than the market currently expects.

So, cue the euro rally, the dollar selling, and the fears that the central bankers will make a policy error, accidentally killing the economic recovery in the process.

Will this come true? Or is this even a realistic fear? To be honest, I'm not sure. But it definitely was enough to spark some fast selling in a market that was overdue for something to crawl out of the woodwork.

Thought For The Day:

When you're arguing with a fool, it is best to make sure he isn't doing the same. -Unknown

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Heritage Capital Research
Serving Financial Advisors since 1989
Serving individual investors since 1980
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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none.

Note that positions may change at any time.

Current Market Drivers

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      1. The State of the Economy
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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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