Tuesday, February 27, 2007

Abrupt market correction

The unsettling abruptness of the market correction may lead to some unpleasant surprises. Virtually everyone expected a correction at some point, but unfortunately this one doesn't have a manageable feel to it. Now everyone will be looking for the wounded. Who got hurt, and how badly. Are any significant counterparties to equity or credit derivatives in trouble? It can become a shoot now and ask questions later environment until the facts are sorted out. The market hates uncertainty, and uncertainty is what we have.

There were a couple of issues that haven't helped calm things down. First, the NYSE's systems somehow got behind on trades and switched to a back-up server, which led to a radical one minute drop in the afternoon. Traders, at least ones not on the floor of an exchange, were in a sense flying blind for an hour or so. Second, bond mutual funds strangely took on average an hour longer than usual to report their results for the day. This is a different issue and had no trading effect, but one can't help but wonder why---just the volume or something else?

This could be an ultimately healthy market event but it's unlikely to feel that way in the morning. Volatility is back and regardless of the near term trading action, this stings in a way that will linger. That said, it is still certain that buyers are lurking, and will likely attempt to lead a rally soon.

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