Wild Week — So What’s Next?

Yahoo Daily ticker reports, Dow Ends One Of Most Volatile Weeks in History Basically Flat — So What’s Next?:

The past seven trading sessions have been nothing short of remarkable.

Last Thursday, after a couple of weeks of steady but relatively normal declines, the Dow suddenly tanked 500 points. Then, after a modest recovery on Friday, it fell 600 points. Then it soared 400 points. Then it plunged 500 points. Then it blasted off to another 400 point gain. And, today, after another 100+ point gain, it appears poised to end the week down, but within a couple of hundred points from where it started the week.

What gives?

Is this wild volatility the start of another massive market crash, along the lines of what happened in 2007-2009, or 2000-2002? Or was it just a "correction" -- sharp and scary, but now over and done?

No one knows, but Aaron and I think the risks are still to the downside.

The market's initial plunge was triggered by the European solvency crisis and the US debt downgrade. The shock of both has worn off, but the fundamental problems have not. Although the US economy is not definitely headed for a double-dip recession, as some pundits were asserting earlier this week, a recession certainly seems possible. And, regardless, the European situation and the US debt-and-deficit problems have no easy fix.

If the US can avoid a recession and the European crisis can be "contained" -- a scary word, given the happy theory in 2007 that the subprime collapse would be contained -- then the market may well have hit its lows for the year. If that happens, historians will likely attribute the recent plunge to investors adjusting to the country's slower growth prospects after the recent slowdown -- say, 2% a year instead of the 3%-4% economists were once expecting.

If Europe continues to blow up, however, or the US does sink back into recession, there's almost certainly more downside for the market. The crash of 2007 began just this way, and it lasted far longer and was far more pronounced than most observers expected.

So, enjoy a well-earned weekend and rest up for the week ahead. It seems unlikely to top this one in terms of pure hysteria, but it's unlikely to be boring.

So is this a bottom? We don't know. What I can share with you is what one NYC hedge fund manager told me:

... still think we have one more leg down before you get the bounce you are looking for. Hedge funds kicked it off but you cant get those type of dislocations without real money selling. Watch the banks, they have led and continue to lead. You have massive intervention in F/X and this is what caused those huge short covering gap ups by mostly hedge funds on very low volume. I could be wrong and this can hold us over for a couple of months like Japan after their QE2 sized intervention after Fukushima in March. But Bank of America (BAC) could barely hold a rally and short ban in Europe tells you people who know whats really going on are scared shitless as that is always a knee jerk last resort. Either way the lows will be taken out at some point until the dust settles and bodies are counted. Keep in mind I am in the camp (used to be very small!) that this is another leg down in a lost decade of our own and unlike Zero Hedge I am a deflationist. So take my opinions in that context.

A friend of mine sent me a Bloomberg article stating Groupama, SA’s second-biggest investor, didn’t sell “a single share” in Societe Generale in the past six weeks even as the stock plunged and analysts questioned the insurer’s financial strength. My friend added: "where there is smoke, there is fire."

Below, the Yahoo Daily Ticker clip and I also embedded CNBC interviews with a couple of technical analysts and a portfolio manager discussing their strategy in this volatile market (all interviews are worth watching). These are volatile markets, favoring traders, not investors, so tread carefully. Chris Ciovacco thinks a new bear market has arrived, but a rally back to toward 1260 on the S&P 500 is possible.

Finally, I embedded the latest Fareed Zakaria GPS, where you can watch two of the world's top economists, Paul Krugman and Ken Rogoff, discuss what is needed to get out of this economic quagmire.