Update 1:15 p.m.:

Another volatile day without any apparent reason.  This isn't the first time that the market has reversed a big early move and it won't be the last.  Heading into the last hour, the Dow was still down about 140 points.  But trading accounts came in the last hour and almost pushed stocks into positive territory.  They missed it by only 22 points.  Given the low of the day was -292 points, traders are going home feeling pretty chipper.  None of the early news that drove prices lower really changed, with the exception of the euro.  Central bank intervention stemmed the selloff in the euro again.  But, no other news came out to turn stocks.  What was most likely the catalyst was the simple hope that stocks would bounce off of this year's lows which came in February.  Once those levels were approached this morning,  speculative accounts started to buy and sellers disappeared.  Is it a long-term buy?  They hope so, but those traders are just in it for a quick trade.  If it turns into more, great.  If it doesn't, they will be quick to exit. 

Bond prices did manage to post gains despite the turnaround in stocks.  The 2-year closed at .76%, the 5-year 1.98%, and the 10-year gained 9/32s to yield 3.17%.  

We'll get Durable Goods Orders and New Home Sales tomorrow.  Both will record gains in all likelihood.  New Home Sales should be very strong.  This is the April number and will include all those buyers rushing to beat the home tax credit expiration.  

Economics will continue to be an afterthought though.  Traders will be hoping for a rebound in stocks around the globe.  Those markets were hit hard last night and did not have time to recover as did the U.S. market.  A big global rebound might set us up for gains tomorrow.  Of course the big IF is as long as there are no more news bombs from Europe. 
  
Update 7:35 a.m.:

After the opening plunge to -292 points on the Dow and the subsequent recovery to roughly -200, the stock market has been relatively quiet.  The index has traded in a range of -170 and -225.  That's obviously a big selloff, but at least the market has stabilized and not triggered a panic.  I doubt if the market stays this quiet all day though.  The Dow is currently down 216 points.

The 2-year is .71%, the 5-year 1.93%, and the 10-year is higher by 17/32s to yield 3.14%. 

I'll be out of pocket for a few hours but will be back after the close today.

Update 7:05 a.m.:

After the first 30 minutes of trading, there is good news and bad news.  First the good news; the Dow has rallied by 80 points!  The bad news is that the Dow is still down 212 points.  The -292 low at 9,774 hit after 15 minutes of trading.  In the S&P 500, 499 of the 500 stocks were lower.  CNBC is busy bringing on every "buy the dip" expert they can get their hands on, but the impact remains limited. 

Consumer Confidence did rise more than expected.  The index increased from 57.7 to 63.3 vs. the expected 58.5.  That is still a very low number but heading in the right direction.  Of course those respondents didn't see today's market.  The Case-Shiller home price index came in weaker than expected with a 2.35% year over year gain.  For the second month in a row, prices fell slightly.

Bond prices remain higher but are off the early peak levels.  The 2-year is .72%, the 5-year 1.95%, and the 10-year is higher by 12/32s to yield 3.15%.  

I'm just now hearing that European central banks are intervening to support the euro again.  The euro fell below 1.22 briefly and is now 1.227.  That might be enough to turn stocks around temporarily at least.  

I'll be back with updates.

Morning Comment:

The 1,000 drop in the Dow on May 6 has been labeled the “Flash Crash.”  Perhaps that should be renamed “Preview of Coming Attractions.”  That “flash crash” low of 9872 might be revisited today.  Based on pre-opening trading in Dow futures, the Dow would drop below that at the open.  Futures are down almost 200 points.  The low has been -230.  Here's why. 

Global stocks were down sharply overnight for a number of reasons.  1.  Reports are that North Korea has prepared its army for war.  Hopefully, this is just another dramatic display, but tensions are high in that area.  2.  Four Spanish regional savings bank, totaling $324 billion in assets, were forced into a merger late yesterday.  This comes just after Spain shut down a $24 billion savings bank yesterday.  The IMF went further by saying more reforms are needed in the Spanish banking system.  3. The euro is falling again, although the euro/dollar exchange is still 1.223.   This is not new territory.  But the euro/yen trade is getting back into the danger zone.  The danger is that it borrowers in yen who converted and invested in euro are reaching the breaking point in currency losses.  This could trigger over big leveraged asset sales around the globe. 

Amid this atmosphere we’re seeing credit spreads widen again.  The 3-month LIBOR rate has moved out to .54%, and the 2-year swap spread is .56%.  As mentioned yesterday, these are sharply higher than a month ago and indicative of growing concerns about financials.  Corporate debt spreads are also blowing out.  In just this month, high yield spreads have widened by 162 basis points.   

It’s very clear that concerns are building almost daily that the financial world is again on ropes.  This is far from the conditions prevalent around the Lehman collapse, but at this pace that might not be too far off.  Fortunately, the economy is in somewhat better shape than it was back then.  At that time in 2008, the economy was already on a clear downward path.  Today the economy is on upward path for the most part.  Still, we can’t ignore the fact that another financial disaster could trump and reverse the positive economic momentum.

Bond prices are higher again.  The 2-year is .71%, the 5-year 1.92%, and the 10-year is higher by 22/32s to yield 3.12%.  The 30-year bond is higher by over a point to yield 4.02%. 

Although economic statistics mean nothing at this point, we’ll get two reports today.  The Case-Shiller Home Price Index will be released and should show another increase.  Consumer Confidence is also expected to be higher by a couple of points.

I’ll be back with updates.  This certainly should be a volatile day unless cooler heads prevail.

Dwight Johnston