"Distance Traveled" Ratio and US Equity Weirdness

I have to say, Monday seemed like a strange day. Apple

-- oh, sorry I meant Nasdaq (^IXIC) -- was down over 0.5%, the S&P (^GSPC) was unchanged, and the Dow (^DJI) was up over 0.5%. It all makes sense when you look at the shares, but it gives me a weird before-the-storm feeling. The EUR/USD seemed to live in a world of its own. Once again we have the dichotomy where the FX and rates crew sees the world one way, and the credit crew sees the world another way. I have no strong opinion on the FX markets, but when it comes to the credit markets (Spain and Italy in particular) I would follow closely what credit people are saying and pay less attention to the FX and rates people. They live in a world of basis points, duration, and liquidity, not a complete lack of liquidity, and where notional and price matter most. More important than anything else, Monday, in my opinion, was the continued volatility, and what happened in the S&P. The "distance traveled" was actually quite a lot for the S&P futures. Not only did we have a big negative move overnight followed by a bounce, followed by a fade to flat, followed by a big bounce, back to the lows, but we also seem to have had a lot of 5-point intraday moves. Little things, like from down 3 to up 2, to flat to up 5, to down 1, etc. This is purely gut recollection now, so take it with a grain of salt, but I think days like this following a period of volatility and reduced liquidity, especially in the credit markets, do not end well. Too often I think we get a day or two like this and then a bigger sell-off. Liquidity has definitely decreased, particularly in the credit markets. Monday wasn't a "healthy" consolidation day. We didn't sit in one place all day and let investors shift their portfolios. We had fear and greed all day. Again, I could be wrong, but remember far too many times discussing a big "distance traveled" day that resulted in minimal change, and seeing a big move to the downside the next day or two. It fits with my theory that volatility will force investors to reduce position size. And most investors are long, so that requires net selling. Maybe it was the Apple effect yesterday and I should totally ignore this gut feeling -- but I can't. Someone already told me that this is a sign of a breakout either way. Maybe. But when I look at how illiquid credit is, I think this is another warning signal. And it isn't just the sovereign debt markets struggling with liquidity; the lack of liquidity is leaking into European corporates, and to a lesser extent, to US credit markets. No tornado yet, but the sky has that eerie color, and the stillness is spooky. Editor's Note: For more from Peter Tchir, check out

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