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Dow Jones Industrial Average, S&P 500: Traders Get Positioned Before Big Government Events

September 29th, 2013

wall streetChris Ciovacco: Worst Week Since 2008 Financial Crisis: Below is a quick refresher course on the 2011 events that led to the “most volatile week in stocks since the 2008 financial crisis”. From Wikipedia:

President Obama signed the Budget Control Act of 2011 into law on August 2, the date estimated by the department of the Treasury that the borrowing authority of the US would be exhausted. Four days later, on August 5, the credit-rating agency Standard & Poor’s downgraded the credit rating of US government bond for the first time in the country’s history. Markets around the world as well as the three major indexes in the US then experienced their most volatile week since the 2008 financial crisis with the Dow Jones Industrial Average (INDEXDJX:.DJI) plunging for 635 points (or 5.6%) in one day. 

Yields on US Treasuries, however, dropped as investors, anxious over the dismal prospects of the US economic future and the ongoing European sovereign-debt crisis, fled into the safety of US government bonds and bonds of other safe haven economies.


Traders Get Positioned Before Big Events

The market’s pricing mechanism allows us to monitor the aggregate risk tolerance of all market participants. Last week we noted the markets carried a bullish profile into the Fed’s non-tapering gala, meaning the market was properly positioned for what many termed as a “surprise” outcome.

Risk Profile 2011 vs. 2013

Were market participants concerned before the August 2011 plunge in stocks or did it come out of the blue? The 2011 chart of the S&P 500 below shows the markets were consolidating for seven months (orange box) before the U.S. credit rating was downgraded in August, meaning the markets were concerned well before the “surprise” came on the credit downgrade front. The blue, red, and green lines are moving averages that help filter out day-to-day volatility.

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NYSE:DIA, NYSE:EFA, NYSE:IJR, NYSE:SPY


 

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