The Stock Market’s Panic Potential


The Odds Favor a “Warning Shot” Scenario – but there is a “But”

As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market’s increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather complacent majority of market participants, by essentially wiping out 9 months worth of gains in more or less just four trading days.





The SP 500, daily – obviously, this chart doesn’t look good – click to enlarge.


The sheer speed of this decline masks the fact that the SP 500 is actually only 163.83 points or 7.67% below its all time high made in May. In other words, this decline doesn’t even amount to a routine 10% correction yet. And yet, as Zerohedge reports, cries for intervention by the Fed are amusingly already going up. We actually don’t believe that the federal purveyors of Anglo-Saxon central banking socialism will jump into the breach that quickly.

Last week’s sudden “1-800-get-me-out” moment certainly wasn’t widely expected, not least because it was an options expiration week, and expiration weeks normally tend to follow certain patterns. Either there is little net volatility, or if the market has a weak close on Wednesday, it tends to rise on Thursday and Friday. This even happened in the October 2014 sell-off, which ended on a Wednesday in an expiration week (with the SPX gaining 80 points between the Wednesday intraday low and the Friday intraday high, rendering a great many puts, VIX calls, etc. that were bought earlier in the week worthless).

As a friend of ours remarked, this

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