Volatility is Back

It seems just yesterday that all of us were enjoying steady market march higher.  Until this week.  All of 2010 gains in S&P500 were erased and it is now in the negative territory for the year.  On Thursday, the intraday swing in the market was over 1,000 points, greatest in history, although the reason for most of that swing appears to be some erroneous trading — the Dow lost some 700 points in 15 minutes, only to recover most of in the next 20.  The VIX index, aka the fear indicator, rose from 2 year low to 1.5 year high.  It seems that not-so-good old days of 2008 are back.  But the main objective reason for market drop is, of course, debt situation in Greece, which I have mentioned several times in my previous communications.

The news that the markets chose to ignore this week were continuing stream of excellent earnings reports and good economic headlines.  Today, for example, the government employment report indicated that 290,000 new jobs were created in April, much better than expected, to the extent that the recovery can no longer be seen as the jobless one.  Nevertheless, selling continued on Friday despite lack of any new developments in Europe.  It seems that the traders were looking for an excuse to sell — and they definitely got one.   And it is not really surprising, as we haven’t had a sizable correction since the markets started their advance in March 2009.   Note that the pullback in January was also caused by Greek worries, but in time markets overcame it.  

While euro zone issues are quite troubling and the euro is likely to slide further, I don’t think Greek problems are a repeat of 2008 Lehman Brothers collapse.  That said, it will take time for confidence to recover, and there is a good chance that volatility may persist in the short term, which I view as an opportunity to add quality companies at good prices.  If the last two years taught us anything, it is that great companies will prosper.