Now What?

“A threat is more powerful than its execution.” -Tarrasch

The concept of a threat being more powerful than its execution (variations of this term also attributed to Tartakower, Nimzowitsch, Mason and Eisenbach) stems from the chess concept that the defending side saddled with consistent pressure of a threat is placed in a position of constant vigilance and as the threat persists, the inducement of an inaccuracy becomes increasingly probable.

The mere preoccupation with the threat may produce heightened anxiety resulting in a blunder and immediate loss of game, or a more subtle situation where the defending side positions pieces to defend the threat resulting in exploitable weakness elsewhere on the board, or the even more nuanced- giving up a critical square. The longer the threat is present the more foreboding and grander in size it psychologically becomes. It's not the actually threat any longer, but the possibility that at any moment it may come to fruition that is the root of the problem being faced.

So what can be expected once the threat is unleashed? The position may still be lost, but the anxiousness also subsides. What was once of great concern now exists and if one had the fortitude to withstand the mounting pressure and can now look clearly at the situation at hand and assess the present position on its own merits, all may not be as horrible as it first seems and the game may still be salvageable.

The threat of an SP downgrade became reality over the weekend and the market responded thus: 5% to 8%+ drops in the major indexes with 98-1 downside to upside volume, with 1301 in my universe finishing down 8%+ or $5+ and 2486 down 4%+. In addition, the Put/Call ratio tipped 1 today indicating bearish sentiment has increased. It does appear that panic is beginning to seep into the market place.

Now that panic is beginning to enter, will capitulation follow? With so many stocks sitting in the barber chair for so long, eventually someone will find a use for all the trimmings littering the floor and begin making wigs. When this occurs is any one's guess, however what we do know is that there are a number of news related events being addressed in markets around the globe as participants digest the current state of affairs, which thus far have been mostly negative. Additionally what we know now are that many of these threats have been executed while a handful remain.

What I'll be paying attention to over the next week or two is whether or not more panic enters the market and whether or not “bad” news begins to get bought with conviction. If these occur and the market begins to curve out a bottom than the bull phase may still be salvageable, otherwise with most of the indexes approaching the 20% threshold delineating a transition from bull to bear cycle, the path of least resistance suggest more downside.