This is getting serious. What looked like a temporary blip restricted to the US market is now threatening to become a full-fledged global problem. Wednesday's panic across emerging markets betrays a nervousness one has not seen since the May 2006 sell-off. The way we broke below the lows of Friday also does not augur well for the near term.
If this was just a US sub-prime issue, the cut may not have been so deep. The problem is that it is pulling down big names. Bear Sterns has a problem with some of its hedge funds, Macquarie Bank has warned its investors of serious losses and big institutions like Lehman Brothers and Blackstone seem to be in a spot of bother. The tentacles of these institutions reach far into emerging markets, a fact that is affecting sentiment.
To further complicate matters, the yen has now broken 118 to the dollar, a trigger for carry trade unwinding. The Dow is down almost a thousand points from its peak and every day there is fresh bad news that is pouring in. It is not curtains yet, but the situation does appear a bit stickier than it did after the first dip.
Closer home, fresh shorts are piling up again. The bears will be enthused by the way the market pulled back after Friday's sell-off and then sold off again. That is an ominous sign. Unwinding in mid-caps has begun, and if the sell-off continues for a day or two, could intensify. The situation is very fluid and one should expect to see high volatility, either way, over the next few days. A series of gap-up and gap-down openings may follow, which makes trading a nightmare.
While it is tempting for investors to see prices at levels that appear attractive in the context of recent highs, a bit of prudence is in order. Remember, this is the first proper scare since the February correction, one should give it some more time to settle.