Equities Dive as Greece Downgraded to Junk, Gold Surges

Tuesday, April 27, 2010

The stock market took a dive today dropping 213 points (1.9%) as Standard & Poor's downgraded the sovereign debt of Portugal two steps to A- and then soon followed with a cut of Greek debt to junk status at BB+. S&P warned that investors in Greece's government notes could recoup as little as 30% of their initial investment should Greece restructure its debt. The euro crashed to new lows on the year now trading at $1.316. The VIX, commonly referred to as the fear gauge, vaulted 30% to close at 22.81, now well off the lows of earlier this month at 15.23. Executives from Goldman Sachs spent the day on Capital Hill being grilled by Senators. I didn't hear much that was unexpected.

The downgrade of American International Group (NYSE:AIG) by Keefe, Bruyette & Woods that I highlighted this morning hit shares hard. AIG dropped 16% for the day taking out any short-term support level. AIG was a classic momo play and typically these plays collapse when the momentum stalls. There is very little fundamental justification for even the $37 price shares are trading at after today's fall.

Gold had a strong day today gaining 1.25% fueling a 1.68% jump in GLD (NYSE:GLD). I doubled my initial position early this morning and then doubled it again in the early afternoon. Yet, I sold 1/3 into the NYSE close because the electronic futures market failed to hold new highs when the GLD ETF was closing for trade at 4:00PM. While GLD looks excellent on a chart closing above prior resistance levels, I took some caution given the lack of confirmation from the futures market. Below are the charts highlighting my thought process. I am looking for a move to new highs in this market and now have a solid cost basis to hold for a move.

There was a great documentary released in early March titled "Quants: The Alchemists of Wall Street". Even with its strangely morose overtones it is well worth watching if you are curious about financialization of our economy. This short film hits on the several decade wave of securitization that we have seen from our banking system and the recent rise of high frequency trading.

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