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Will Turnaround Tuesday Save the Day?


Wary traders flip the switch on the world's wildest reality show.


It's Turnaround Tuesday in the 'Ville and the animal spirits are alive and well.

I've heard a lot of descriptions for what we've recently endured in the financial markets: a slow-motion crash, a deep recession, a healthy correction, the beginning of the end.

If nothing else, the violent, gut-wrenching volatility drives traffic and ratings, which is a healthy event for media concerns that are choking on information deflation, although it's less pleasant for the rest of us.

What do I call it? An inevitable comeuppance and, dare I say, ultimately constructive if we're allowed to take our medicine.

The story that caught my eye this morning is that the Fed May Strengthen the Stimulus Pledge on New Recession Concerns.

Call me old fashioned but I was taught about this thing called "the business cycle." When the economy fluctuated in a positive direction, it was an "expansion." When it turned negative, it was a "contraction." There was a natural order to this process and recessions, much like forest fires, were scary and dangerous yet paved the way for a fertile re-birthing.

At some point over the last decade, "recession" became a dirty word. We touched on this at the height of the financial crisis when Bank of America (BAC) married Merrill Lynch (visualize the shotgun) and Lehman Brothers was fitted for a toe-tag. We again vibed on it last year when we offered:

"If we were allowed to enter recession after the tech bubble burst -- the other side of the business cycle was considered anathema and we were deemed unpatriotic if we weren't bullish -- we would already be on the road to recovery. Instead, we messed with Mother Nature and now she wants to -- and ultimately will -- exact her revenge."

The enormity of the economic condition is larger than any one man, political party, or sovereign country (apologies to the haters out there -- it's true). Put another way, if we called a time-out for one year and spent every single day (including weekends) trying to unwind the derivative machination and track the counter-party risk, we wouldn't scratch the surface of what needs to be done. Given global markets never sleep (and political processes take time), you get a sense for the task at hand.

Obviously, we can't spend all day "wallowing in the why," as time and market bells wait for no man.

So I'll offer a few takes on the path as we keep one eye on the destination:

  • The first fade (lower) today (from jacked-up futures) is the easy trade (as discussed this morning in real-time on our Buzz & Banter).

  • I wouldn't be surprised to see a widespread ban on naked credit default swaps (cue counter-party contagion as an unintended consequence) as the next, and perhaps last, bullet.

  • We're massively oversold (on a Turnaround Tuesday, no less).

  • Europe continues to take it on the chin (and that's been a strong tell for the stateside price action).

Random Thoughts

  • Yesterday's Yahoo Daily Ticker interview: With No Bailouts Coming, US Must Take it's Medicine.

  • We asked on Friday whether we saw capitulation. We opined, after looking at the long-term VIX chart, that we hadn't. Check an updated version of the same chart below.

    Click to enlarge

  • Most of Europe (with the exception of the FTSE) is now in a bear market, at least through a conventional lens (20% decline from the highs). If we're to join them, the S&P must trade to 1096, which represents a 20% decline from the May high.

  • Goldman Sachs (GS) broke to a fresh 52-week low yesterday. And yes, I still sense they'll take themselves private when they're trading double-digits (just me).

  • We asked the question on Friday, Will the Stock Market Crash? That was before the S&P downgrade but I think yesterday was more about Europe than it was about a rating change (which was telegraphed).

  • The forced selling may be coming from overseas, as well as a few big stateside funds which I hear are shuttering their doors. As Bennet Sedacca would say if he were around today, somebody has dialed 1-800-GET-ME-OUT.

  • According to MV Professor Jason Goepfert of Sentimentrader, the only two times we've been as oversold on a 10-day basis as we were yesterday was when Germany invaded France (1940) and the 1987 crash. SO, unless you believe that this time is different, a vicious Snapper could arrive at any time.

  • Finally, I'll be joining Dylan Ratigan tonight on MSNBC at 4:00 EST as we talk about the markets, policy, and more.

  • Good luck today!


Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.

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