Step Out of the Way; Things Could Get Ugly

While the US markets were closed for a holiday Monday, world markets crashed. Not sold off. Crashed. Germany was down 7% yesterday and opened down almost 5% more today. London was down more than 5% yesterday and opened 2% lower today. Japan is down almost 6% and it closed at daily lows threatening to move even lower tomorrow. China closed down almost 9% and it also closed near daily lows after being down a whopping 13.7% in just two days. India's Sensex opened down more than 11% today spurring a one hour halt.

This takes us to the US markets. There is no doubt about it. The open will be ugly. The big question is, is this a buying opportunity, a signal to cover short positions, or is it still not too late to sell?

We believe that September 11, 2001 can give us a clue. The market will surely do its own thing today but as you can see from the post 911 market crash it paid to sell at the open:

Prices on the S&P index fell 10% lower from the post 911 market open. And that also followed an emergency interest rate cut from the Fed – no doubt we will get an emergency rate cut this week.

Again, 911 is not a road map as to what will happen today. World markets seem to be selling off harder this round than they did after 911. Probabilities are pretty high that we will see a capitulation event sometime this week and next week at the latest. Probabilities are also pretty high that the gap at today's open will fill sometime in the next couple of weeks.

There are a huge amount of unknowns though. Our advice is, if you are short, stay short. If you are holding long trades, sell at the open today and reenter only after the market stabilizes; you will likely be able to enter at lower prices. Mainly, just stay out of the way today. It could be a bloodbath.