The global equity market correction continued today, with the Dow Jones Industrial Average losing 376 points to close at 10,068.  The S&P 500 and the Nasdaq lost 3.9% and 4.1%, respectively, wiping out all gains for 2010.  Very few stocks were spared, and the Volatility Index, a measure of fear in the market, spiked 30% to close at the highest level since March 2009.  U.S. Treasuries enjoyed strong safe-haven buying, as the 10-year Treasury rose over a point to yield 3.21%.  The U.S. Dollar declined today as central banks intervened to attempt to stem the Euro’s stunning decline, but the Dollar remains up 9% in 2010.

There is no shortage of negative news driving this correction: European debt contagion fears, Germany’s short-selling ban, slowing global economic growth, and the imminent passage of financial regulatory reform legislation.  But regardless of the specific catalysts, investors are shedding risky assets from portfolios, including stocks, commodities, high-yield bonds, and growth-oriented currencies.  The recent declines are further proof that the May 6th afternoon plunge was due to the combination of heavy selling and a lack of liquidity, not a “trade error.”

Where are the equity markets headed from here?  The chart below shows some key levels on the S&P 500 Index to watch.  The market is near the intra-day low of 1,065 during the May 6th plunge, an area where a short-term rally could begin.  Below that is the 2010 year-to-date S&P low of 1,044: a breach of this level suggests a new bear market and the potential for an additional 10% decline.  Given our belief that the sovereign debt crisis is far from over, we will look to take advantage of any near-term strength to further hedge the portfolio.

Market Update


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