Stocks plunge: There's just too much going on

Stocks plunge: There's just too much going on
By Frank Ahrens
Copyright by The Washington Post
May 20, 2010
http://voices.washingtonpost.com/economy-watch/2010/05/stocks_plunge_theres_just_too.html?hpid=topnews


More than anything, stock markets hate uncertainty, and there's plenty going on right now, driving markets lower.

In the first 45 minutes of trading, the Dow is down 2.5 percent.

The broader S&P 500 is down 2.9 percent.

The tech-heavy Nasdaq is down 2.9

Let us enumerate all the uncertainty, in no particular order:

At first, we only thought we had to deal with a sovereign debt contagion in Europe. Now, it looks like we're facing real fractures not only in the euro but in the eurozone bond. Germany bans naked short-selling on its own, France gets upset, the European Central Bank says, "Can't we all just get along?" Sovereign debt continues to be a problem in Greece, Portugal and Spain; national deficits are a problem in the U.K. and elsewhere. Big problem: Europe is the biggest buyer of U.S. exports. If they can't buy what we're selling, we're in trouble. Thomson Reuters says that all of the S&P 500 companies have an average 25 percent exposure to Europe; i.e., 25 percent of their business comes from Europe. Again: Five Reasons Why Europe Is Sick.
Financial regulatory reform on Capitol Hill, even though it appears to be moving toward passage, is doing so with all the consistency and predictability of an old pickup with a busted clutch. Lurch forward, with Sen. Blanche Lincoln's (D-Ark.) punitive proposal on derivatives; stall, with Sen. Chris Dodd's (D-Conn.) compromise amendment on for Lincoln's proposal; lurch sideways, as Dodd removes his amendment. It looks like chaos on the Hill to Wall Street, which is saying: Give us new rules. Tough ones or lax ones, but let us know what the new rules are.

Speaking of new rules, the SEC is imposing new rules on stock trading, in an attempt to prevent another 900-point flash-crash plunge -- even though the agency doesn't know for sure what cause the first flash crash.

A wobbly recovery at home. This morning, we learned that last week's new jobless claims took a surprise jump upward. Moments ago, the Conference Board's monthly index of leading economic indicators retreated slightly, and last month's number was revised downward.

Technical triggers in the stock market. Some traders are called "technicians." That means they follow trends closely in the markets and buy or sell based on those. For instance, when one of the market's "moving averages" -- a longer-term look at stocks, designed to smooth out day-to-day volatility -- rises or drops through certain levels (say, when the S&P 500 drops below 1100, as it just did), traders will just begin selling, regardless of how the stock is doing recently. Selling drives the markets down.

Germany's parliament votes tomorrow on whether to fund its portion of the European bailout.

So, the takeaway is: Until at least a couple of these variables start to simmer down and show some stability, it could be a bad summer for stocks.