Triple-witching options expiration on Friday sent trading volumes on both major exchanges soaring. The major market indexes were down fractionally, but the NASDAQ Composite Index dropped enough to log another distribution day.
The big news over the weekend, however, was an announcement that the Euro Zone and the International Monetary Fund will give 10 billion euros ($13 billion) to bail out ailing Cyprus, but depositors with more than 100,000 euros will be taxed at 9.9%, while those with less will be taxed at 6.75% to raise a total of about 6 billion euros. It is the first time in the Euro Zone’s five-year-old financial crisis that depositors will be on the hook, so to speak, for future bailouts and lose money thereby. This sent Asian markets diving last night while U.S. futures sold off over 1% on Sunday afternoon. This morning U.S. futures have recovered a decent chunk of their losses as of the time of this writing, but it remains to be seen how the day will end. At worst we will see another distribution day in the indexes, but the sell-off does bring up the question as to whether this is a a buyable event. In our view, it is too early too tell, and investors should wait to see how the day develops. Stocks coming down into areas of logical support might be "probed" on the long side, with the idea of maintaining quick stops should the sell-off gather further momentum.
Japan's parliament approved Haruhiko Kuroda as governor of the Bank of Japan, who is known for his easy money policy to boost growth in the world's third-largest economy. This bodes well for Japanese stocks that have been in a strong uptrend since November 2012, in large part due to the yen's continued decline.
In economic news, consumer prices in February showed more inflation than expected. This is a negative for the markets since as inflation rises, it leaves the Fed with less room for quantitative easing. While CPI is a manipulated statistic, that the manipulated statistic showed more inflation than expected begs the question of how real inflation is actually faring. In addition, the New York manufacturing survey for March missed views, and the University of Michigan's consumer sentiment gauge for March also lagged estimates, adding additional evidence of a struggling economic recovery. Not all the news was bad as industrial production for February and capacity utilization both topped estimates, but again show that there has been a mixed bag of economic data, with more signs of a struggling economy than a recovering one, especially when accounting for the possibility of manipulated data.
With some crosswinds now starting to hit the market, investors should simply keep a close eye on their stocks and adhere to downside stops. Pending further evidence, the sell-off could be of a temporary nature, but again this will depend on how the next couple of days play out for the general market.