Options Insights Blog

When There is No Way Out

This past week was one for the record books, a decline of near biblical proportions Thursday with high volatility Friday that really gave everyone the chills.  Was this to be 2008 all over again?  I doubt it, but those wounds are still fresh – and our accounts still reflect the pain.  Should we be surprised about the recent carnage?  No, not if we take a sensible look at the situation.  If we choose to ignore the issues and kick the can down the road, then we are as blind as our lawmakers – and deserve the eventual pain, which seems to be coming sooner rather than later.

Debt Problems and a Downgrade

The issues surrounding the mounting debt have been cause for concern for years.  So, Friday evening S&P decided it was time to downgrade the credit rating for US Government securities.  This may have some ripple effects but if anyone is surprised they have been living under a rock for years.  It appears the debt ceiling deal did not go far enough to address the long term debt problem.  When given a chance to make a bold statement our politicians chose a different path.  This downgrade is the result of ineptitude.  I don’t know what will become of this as I’m sure it is not a positive in the short run, but perhaps this was enough of a wake up call to cut up the credit card and put some serious debt reduction at work.  In my mind this is a great day for America – the unlimited credit card has been officially cut (for now).  The message has been received loud and clear:  No more reckless spending will be allowed or consequences will be felt.  We are over the limit, time to start paying it down.

It’s been a Cruel Summer so far.

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Where Do We Go From Here

The markets have a funny way of performing.  They are a discounting mechanism and reflect news far in advance.  The recent activity probably indicates where our economy will be in 6-8 months.  You guessed it, most likely no growth or possibly a shallow recession.  Are we in or even headed for a bear market?  Too soon to tell, but a year ago it seemed we were destined for it.  Volume has been massive, institutions are distributing stock.  Stocks have tumbled fast and furiously over the past couple of weeks but so has oil and other commodities, hitting lows not seen in months.  Gold and silver remain viable with the uncertain currency issues worldwide.   The technical damage inflicted on the charts is quite apparent (see charts) and when we look at longer term trends they are on the brink of being reversed.  Perhaps there will be a good sized bounce coming but that may be an opportunity for sellers to come in.  This will be a wild trading environment.

Psychological Effects

The recent sideshow in Congress on the debt ceiling deal along with the disarray in Europe has shaken the nerves of the investors and trader.  This crisis of confidence persists and creates a high wall of doubt in their minds, will they ever get back in the game again?  The damage to the mind can be long-lasting, again the jolt from 2008 still fresh.  It takes a big change to shift the mindset along the risk curve, not done quickly.  As investors we rely on markets to provide us with long term returns that will provide us with some sort of nest egg into the future.  However, these are times of needed austerity and retrenchment, can the country deal with that major adjustment?  The land of plenty has become the land of  excess, soon to be the land of shrink.