Black August wasn't supposed to happen until much later or even
at all. That's what Wall Street's gurus have been telling us. They
certainly didn't see this coming and how could they? They've been
on vacation in the Hamptons.
Meanwhile, precious metals (NYSEArca: GLTR) and long-term U.S.
Treasuries (NYSEArca: TLT) are surging. Why hasn't the violent sell
off in stocks (NYSEArca: VTI) been interrupted with any circuit
breakers or trading halts? Before we answer that, let's delve into
the unimportant topic of corporate earnings. (We say 'unimportant'
because that's how the stock market is treating the subject of
earnings right now.)
Do Earnings Matter?
Despite a 17 percent drop in 15 trading sessions for the S&P
500 (NYSEArca: SPY), Chief Strategists remain bullish. Goldman
) and Barclays (NYSE: BARC) expect the index to end 23 percent
higher (from 1,140) to around 1,400 by the end of 2011. Last year
they stuck to their guns and we're proven right, but will this year
The primary thesis behind S&P 1,400 by year-end is that good
earnings will lift stocks. For third-quarter results, 75 percent of
reporting S&P companies have topped profit expectations on
increasing sales, according to Bloomberg.
Despite this, the stock market is signaling a double dip
recession. Oddly, this urgent memo still hasn't yet reached any of
the desks at the National Bureau of Economic Research. According to
their members' slide rulers, we haven't been in a recession for a
few quarters. Are they serious?! That's why it's best to listen to
the mother of all leading indicators (the stock market) and to tune
out the out-of-touch academic mumbo jumbo.
Is the South Korea 'Solution' coming?
Financial regulators like the Securities and Exchange Commission
(SEC) are closely watching the stock market's erratic behavior. And
if stocks keep sinking, don't be surprised to see them implement
the South Korea 'solution.' What is it?
In response to falling stock prices, South Korea's Financial
Services Commission just banned the short sale on all stocks until
November 9. The country's regulators already had bans against short
selling in publicly traded financial companies.
If a similar move happens in the U.S., it would ape the South
Koreans and be a repeat incident of 2008. It was then that the SEC
placed a temporary ban on shorting financial stocks. At that time,
the intense selling was on banking (NYSEArca: KBE) and financial
shares (NYSEArca: XLF). But this time around, the selling has
reached global proportions (NYSEArca: VB). Could we see a situation
where the SEC bans short selling on a broad swath of stocks?
Q3 Circuit Breaker Levels
The reason trading curbs haven't yet kicked in, is because none of
the stock market's declines have violated single day thresholds.
Each quarter, the New York Stock Exchange (NYSE) calculates and
sets circuit-breaker levels as 10, 20 and 30 percent of the DJIA
(NYSEArca: DIA) average closing values of the previous month,
rounded to the nearest 50 points.
For the third quarter, the 10-, 20- and 30-percent decline
levels, in the DJIA are the following:
Level 1 Halt (10% drop)
A 1,200-point drop in the DJIA before 2 p.m. will halt trading for
one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and have
no effect if at 2:30 p.m. or later unless there is a level 2 halt.
Level 2 Halt (20% drop
A 2,400-point drop in the DJIA before 1:00 p.m. will halt trading
for two hours; for one hour if between 1:00 p.m. and 2:00 p.m.; and
for the remainder of the day if at 2:00 p.m. or later.
Level 3 Halt (30% drop)
A 3,650-point drop will halt trading for the remainder of the day
regardless of when the decline occurs.
Remember: Circuit-breaker points represent the thresholds at
which trading is halted marketwide for single-day declines in the
DJIA and by that measure, we're not there.
The percentage levels were first implemented in April 1998 and
the point levels are adjusted on the first trading day of each
quarter. The final adjustment to these levels for this year comes
on October 3.
In a market with successive declining days of 2-6 percent like
we've had over the past 15 trading sessions, trading halts won't
save you. And neither will temporary measures to artificially boost
stock prices. ETFguide's
Profit Strategy newsletter
outlines how to successfully navigate the market's rough waters. In
the end, there is no substitute for having a rational and
executable investment plan in any environment, especially this