Testing . . . one . . . two . . .

After the jaw-dropping decline of late July/early August, we’re now in what appears to be a bottom testing phase. It’s probably not an inappropriate metaphor to think of testing the ice on a pond. So far, the testing is going okay. Yesterday’s drop in the S & P 500 stopped right at the trend line defined by the August 9 and 22 lows, meaning that each low has been higher than the previous low, the simplest definition of a trend. Now, if the trend gives way, we’ll be headed back to that August 9 low.

Here’s what the picture looks like.

There is still plenty that can go wrong in the world, and investors are on high alert for them. I’ve maintained for a while that the problem is Europe, and what’s seen as an eventual blow up there is being increasingly referred to as a Lehman Bros. moment, the period of time begun on September 15, 2008, when the market went into freefall. It appears that Greece is circling the toilet bowl, and the sooner the country can be allowed to default–in whatever form it takes–the better. That it might not be the worst thing was on evidence today in the Greek stock and bond indexes. While the 1-year Greek note now yields–I AM NOT MAKING THIS UP–89.18%–yesterday it yielded a mere–I AM NOT MAKING THIS UP–80.483%. That’s a bond that’s not going to get paid back. At the same time, the Greek stock exchange was up by +8%. The fine folks at Miller-Tabak mused that some bond pain might be good for the economy; therefore, bonds down, stocks up.

Please note the +14.5% and +8% (today) pops. To me, those are indications of a severely oversold market. Perhaps one thing that happened over the past month’s equity volatility is that market participants are geared up–maybe inured is a better word (no, not injured, although that, too)–for the worst case scenario in Greece. Anything better than worst would be good (huh?)

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