The condition of Europe has become the psychological linchpin governing the world’s financial markets. Even the notoriously insular American investors are fretting about Europe’s woes on an hour-by-hour basis, which is incredible. The euro currency has become the focus of the global Europe fears, trying unsuccessfully to shoulder this crushing burden. The result is the euro’s recent panic-like plunge.
I sure don’t use the word “panic” lightly. In stock-market terms, a panic is a 20%+ plunge in the headline stock indexes in 3 or 4 weeks. In October 2008, the flagship S&P 500 (SPX) plummeted 30% in 21 trading days! Panics always cascade into existence in weak markets from already-low prices. Before that October 2008 panic month hit, the SPX had already fallen over 22% in its cyclical bear market.
This is in contrast to crashes, which erupt in very strong markets usually near the ends of secular bulls. In stock-market terms, a crash is a 20%+ decline in the headline indexes in 2 or 3 days. Since the euro’s recent plunge emerged out of weakness and lows, it definitely isn’t a crash. The definition of a panic is “a sudden widespread fear concerning financial affairs leading to credit contraction and widespread sale of securities at depressed prices in an effort to acquire cash”. This definitely fits the euro situation.
Currencies move much slower than the stock markets in general, so the 20% stock metric is certainly too steep to define a currency crash or panic. Over a brutal 4-week span ending this week, the euro plunged 9.5%! For the gigantic currencies which usually move with glacier-like lethargy, such a fall over such a short span is certainly “panic-like” if not a true panic.
While technicals measure and quantify panics, it is psychology that spawns and sustains them. And in sentiment terms, the euro is definitely deep in the throes of an epic panic. The bearishness, pessimism, and fear surrounding the euro is mind-boggling. Nearly everyone expects it to continue lower in an endless death spiral. A growing fraction of traders is even predicting parity soon, the euro trading at $1.00 even. That is another 18% lower from this week’s lows!
Fear has to be extreme to drive a panic, and we are certainly seeing the euro plagued by extreme fear today. But extreme emotions are never sustainable. Excessive fear quickly burns itself out. Soon everyone who wants…
