Tomorrow morning could be a volatile one for stocks! I know in our commentary section there has been some discussion that it would take an unexpected or unforeseen event that would finally spark a real correction in the stock market (-10%). I'm sure no one was expecting Muammar Qaddafi, the leader of Libya,
to actually bomb his own people to quell the protests for change.
Over the weekend Qaddafi's son warned protestors that they need to engage in talks or face a civil war. Looks like they didn't want to talk or Qaddafi has decided to take the hard-line approach. On Monday there were several reports that Libyan warplanes and helicopters had started bombing the city of Tripoli. Hundreds are being reported as dead. There was one report that two pilots refused their orders to bomb their own people and took their planes to another country to defect. There are also reports that Muammar decided to travel to Venezuela during or after the attack. A lot of this news has yet to be confirmed.
Investors have been concerned that the protests in Egypt would spread and in recent days there have been some clashes between protestors and the army in Bahrain. Plus, the violence seems to be spreading into Yemen and Iran. What would really, really concern the global markets is if these protests and violence flared up in Saudi Arabia, since they are the crucial supplier to the world's oil market.
Meanwhile China is dealing with its own protestors. Citizens seeking change in China were trying to schedule protests across a dozen major cities calling it the "Jasmine Revolution". Yet the Chinese government was intercepting and blocking text messages, websites, blog posts, and Internet searches for anything related to protests or the situation going on in Libya, at least that's the story according to sources at Bloomberg.
At the moment we're not seeing much of a reaction in Asian markets. The Chinese Shanghai index is up +1.1%, the Hong Kong Hang Seng down -0.4%, and the Japanese NIKKEI index produced minor gains +0.1%.
It was a different story in Europe on Monday. Markets were down across the board. Germany and France's major market indices were both down -1.4% while Britain's FTSE was only off -1.1%. I do think we should keep this in perspective. A -1.4% drop in Europe isn't that big of a deal. Germany actually had some positive news with the Ifo institute's business climate survey hitting a new all-time high.
We can not know how the U.S. markets will react on Tuesday morning. At the moment odds are good that stocks will open down. Maybe we see a -1% or -2% move or maybe this starts the long awaited correction bulls and bears have been hoping for. I strongly suspect that the buy-the-dip mentality is still very much alive and well. I would take a cautious approach on Tuesday but I would be watching the markets for another opportunity to buy stocks that dip to or bounce near support levels. Of course given the market's up trend we may be looking at very short-term support levels. Even if we saw a -3% decline that would only be a drop to the 1300 level on the S&P 500, which would definitely be an entry point in my book!
Big picture the news of violence and death in Libya is very sad but I am not expecting it to have a lasting impact on the U.S. stock market.
If you are trading any resource or commodity names I would definitely expect some volatility. The U.S. dollar is likely to rise as a safe-haven trade and a rising dollar would normally put downward pressure on commodities. The exceptions might be gold and oil. Gold is also seen as a safe haven play and rallied to $1,400 an ounce on Monday. Meanwhile Libya and most of the countries that are seeing protests are oil producers. Brent Sea crude oil contracts spiked higher with a +3% gain to a new two-year high of $105 a barrel.