Market conditions are extremely oversold in all risk assets right now. Some assets have entered a four standard deviation price range away from their normal mean. Sentiment is super bearish across the board for many global stock indices and major commodities, to the point where an inflection point could easily occur. Certain commodities and European equity markets are slaughtered. Numerous assets are down 8, 9, 10, or even 11 weeks in the row. Other assets are down 8, 9, 10 or even 11 days in the row. These are extreme historical statistical events dating back decades. Something has to give soon...
It all points to a possibly of a major bottom occurring eventually and a massive buying opportunity. Having said that, if we continue down this selling road and we do not get a rally in risk assets soon, which drags us outside of oversold conditions, than we could crash from these oversold level. That is right... we could crash from here! Markets tend to crash when fear and panic spreads, while the technical conditions refuse to exit oversold readings. With no buyers coming into the market, prices just sink lower and lower until full blown panic takes hold of all market participants.
Greece seems to be the catalyst yet again. If Greece leaves the EU and completely defaults on its bonds, banks from all around the Eurozone (even globally) will incur huge losses. Since majority of these EU banks are leveraged anywhere from 20 to 1 towards 40 to 1, liquidation in risk assets will take place to square off the balance sheet and reduce banks overall leverage. Some banks might even blow up. Even if the event lasts only for a several days, price levels could sink really really quickly. Similar type of event occurred In September and October of 2008 during Lehman Brothers bankruptcy. A more mild version occurred during MF Global liquidation just several months ago.
Personally, the current market conditions have certain type of Lehman II resemblance. On the other hand, technicals, sentiment and price data seems to point to an inflection point buying opportunity. I am not sure which one it is going to happen, the market will decide for all of us very shortly. Strong price action reversals could / should be bought for a rally, while further breakdowns could / should be major warning signals.
Therefore, I would advise all to be very careful and take necessary precautions to protect yourselves in coming days and weeks. Hedge your core holdings in portfolios and reduce leverage. Leave cash on sidelines for a buffer. Finally, for those die hard contrarians out there... they should use this post (and the current market sentiment) as a signal that maybe it is time to buy right here... right now! Good luck.