Wild volatility means stock markets currently resemble a sports match...
LET'S FACE IT. You just don't get big moves like this in a normal bull market, writes Dan Denning, editor of the Daily Reckoning Australia.
Down 1.8% with less than an hour to go in Tuesday's trading session, the S&P 500 came from out of nowhere to rally 4% intraday. It closed up 2.3%. Take that you lousy bear market.
Rallies late in the game are the sort of thing you expect at a sporting event. You don't expect them in a stock market, especially a stock market dealing with an escalating European banking crisis. But as we've said before, increasing volatility is the sign of an unstable system. This system is not stable.
What caused Tuesday's big last minute reversal? Who knows? Nobody knows. Crowd psychology is a good guess. Another likely culprit is an article that appeared in the Financial Times late in the New York session.
The article reported that finance ministers in the European Union (EU) are:
'Examining ways of co-ordinating recapitalisations of financial institutions after they agreed that additional measures were urgently needed to shore up the region's banks. Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe's banks could withstand the current debt crisis.'
And that was it. That was enough to lead to a turnaround on Wall Street and a huge rally in banks stocks. Seriously...that was it.
Little details were not covered in the plan. Those details include: how big bank losses will be on Greek, Italian, Portuguese, and Spanish government bonds, how much capital European banks will need after taking losses, where that capital will come from if the bonds causing bank losses are issued by governments that are likely to default.
But you should never let details get in the way of a good story.
And now the real question is when will Greece be allowed to default? After that, will investors believe whatever charade the EU comes up with to fund the European Financial Stability Facility?
Investors are a pretty gullible lot during a bull market. But this isn't a bull market anymore.
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