PIIGS part 2

I know I said I wasn't going to post for a while but I had to chime in based up today's action. The market now appears to be focused on the widening of credit spreads of all the PIIGS not just Greece. Although this was happening well before today, Moody's downgrade of Greece debt to junk may have been the straw that broke the camels back so to speak.

Unlike the GS fraud news which I felt was a weak excuse for a correction, these contagion concerns in Europe is indeed a decent excuse for a correction...not a bull market killer but a correction. It seems apparent to me that a bailout of all PIGs is going to be required...and it will happen. People talk about moral hazard this and moral hazard that but after the collapse in 2008 which was triggered by letting Lehman fail i.e. doing nothing governments aren't going to opt for doing nothing. And governments have also realized that bailouts can in fact work. The US government's investments in Citigroup and GS for example not only were successful but profitable.

So what happens now? Well, when you see the market get slammed like today and close at the lows it's likely that the selling isn’t done yet even if there's some sort of bounce attempt tomorrow which I wouldn't be too keen betting on especially if it happens first thing at the open. Now, if the market senses some sort of blanket rescue package for PIGS is imminent then this thesis would likely be invalidated and a strong rally recouping today's downside move would be likely the result.

I noticed today, just like with every other correction, the same wrong way loser retail traders who since last spring have been mauled by this market with repeated shorting attempts get euphoric on days like today. It tells me that the bull market is still in tact and that these clowns STILL haven't learned their lesson and need to be punished again. But the funny thing is that when these clowns happen to actually win one on the short side, they cover too early missing out on at least half of the decline.

The VIX has spiked massively today already on its way to hitting overbought on the RSI but it's likely to go up a little more and there likely needs to be a string of high pcrs as well. Today's pcr was quite low considering the damage.

Contagion fears have in the past rattled markets such as the 1997 Asian contagion. But these are not bull market killers and they are eventually dealt with via a bailout of some sorts. 90% of the times the bull market killer is tight money supply during a time when excesses have been building up in the economy i.e. greed. We don't have either whatsoever right now.

Bottom line: Until some sort of blanket bailout package for PIIGS is announced or is suspected, be on the defensive here in the ST. But LT investors shouldn't be concerned so long as you can sleep at night with your exposure. Remember, in the end it's always about earnings and problems with small countires like Greece and and Portugal aren't likely going to derail the strong trend in earnings going on right now.