The Knee Jerk Effect

Remember I've been warning about the knee jerk effect when it comes to F_O_M_C policy statements, all the bulls of Wednesday, where were they today?

Remember late last week we saw financials starting to go out of rotation and thus kick one of the 3 major legs of the market from under it? Well Financials had the worst day of the year 2 days in a row. Also out of rotation today were the other 2 legs, Tech and Energy. Utilities were the best performing in my sector rotation which speaks to a defensive market.

Treasuries performed relatively well, especially into the later part of the day, again, defensive trade.

The Dow was the best relative performing index on the day at a -.18% loss, even though 22 of the 30 closed down with the 23rd closing at 0%. Wouldn't you know it, CAT the second most weighted stock in the composite was one of two components closing up more then 1%, the other was the 6th heaviest weighted stock, 3M. Once again, defensive trade.

As was expected, the Euro did break that late day support it found, this is not constructive for a marker that has been virtually in lockstep with the Euro over the last week.

There's one more support area at $1.3044 then it's $1.30 and we're back off to the races.

As mentioned earlier, Portuguese 10-year yields hit 15%, unreal! However, after the Merkel announcement about considering making it illegal to sell bonds that have had rating's cuts and after seeing the ECB try to weasel out of taking a haircut on Greece debt, the minute Portugal said it may need another bailout, the first thing bond traders most likely thought of is the ECB/Merkel stance and the breakdown of equal protection for bond holders and Portugal is evidence of what I said would happen after Merkel made that statement. The bottom line is the ECB will have to step up Portuguese bond buying, which means when a debt restructuring comes, the private sector haircut will be exponentially larger in relationship to how much the ECB holds. The EU and world better pray that Greece doesn't stuff retroactive collective action clauses down bond holders throats with a back door exit for the ECB. And in the best case scenario, if the ECB does take a haircut with everyone else, wait for every EU Central Bank to take some sort of action (legal if possible as they will be stuck with the losses as well) against the ECB for violating the Lisbon Treaty. The EU has been in a damned if you do, damned if you don't situation from the start, they just keep adding more reasons to be damned.