Italy Yesterday, Spain Today

Selling pressure continues this morning, though somewhat less intensely than yesterday according to US futures.

Following the news out of Italia on Monday, we move this morning to España! Spain’s budget deficit may be more than twice as large as had previously believed. Reuters reports that 6 Spanish banks have failed the Stress Tests, adding to pressure on European markets and the Euro This is leading to concerns that the true state of regional finances is far worse than the previously believed levels. European markets got rocked — as of this writing, they are down 2%, but off of the lows of 3.5%.  One analyst noted “the Euro continues to decline, but remains grossly overvalued.” The Euro broke the 140 level — its at 1.39, the lowest levels since March of this year.

What might that downgrade look like? Does the move Awful to Terrible change many bond holders views?

Markets in the US had an ugly day yesterday — whether it was overdue or in reaction to Italy is almost beside the point. Reaction to the news was pretty ugly, and as we have learned over the years, market reaction is more significant than the underlying blah blah blah.

The sell off yesterday began early and continued all day, with US markets closing fairly close to their lows. Unlike Friday’s post NFP trading, there was no late-day reprieve.

Yesterday’s sell-off appeared to be a 90% Down Day, (~94%) and Lowry’s noted that selling intensity was accelerating (Friday was an 82% down day). They note:

The surge in Supply has come on the heels of a rally on apparently strong Demand, given the July 1st 90% Up Day and July 7th 80% Up Day. This emergence of heavy Supply raises the question of whether the rally from the late June low was only a rebound in an ongoing correction rather than the start of a sustained move higher. The next couple days of trading should help provide an answer.

The claimed HFT liquidity was nowhere to be found. This statement has gotten get moved to the 3 Biggest Lies Hall of Fame: 1) The checks in the mail, 2) I won’t cum in your mouth, and 3) HFT Traders add liquidity to the market. All told with a straight face to serve a purpose to willing fools.

Today’s initial  selling looks to start off intensely, but don’t be surprised if Traders shoot for a turnaround Tuesday.

The playbook following 90% Down Days is that we typically see a rebound rallies of 2-7 days. The quality of a rebound rally (if we even get one) determines if the selling exhausts Supply to create a bottom, or if market pullback falls further. (Note that 90% Down Days in May and June 2010 were followed by more selling, and the 90% Down Day in July 2010 was followed by a strong rebound).

That’s technician-speak for “I have no idea if this is the start of something ugly or not.”