I woke up at 4 AM this morning unable to sleep, thinking about what might be happening in European markets. I spent six months last year with hardly a decent nights sleep because of Europe and it seems like dejavu all over again. Last year market participants prepared for another 2008 while this year it seems they are preparing for another 2011.
There are numerous difference between last year and the current year. Last year market participants were giddy at the beginning of May. This year there was excessive optimism at the end of March albeit not to the extent we saw last year. Since then market participants have turned cautious as we have corrected considerably over the past 5 weeks.
When push came to shove last year European leaders did not let the system collapse. In the European elections hawkish leaders found themselves without a job and in Germany Merkel's party is losing support. This leads me to believe it is extremely unlikely that European leaders allow the system to collapse. After de-risking at the worst time last year market participants are unlikely to de-risk to the same extent.
In the short run the market is not yet out of the woods as we are not yet oversold. The good news is that the complacency that had built up after a 6 month rally is no longer present. There was a lot of put buying yesterday and we saw some fear. By early next week we have the potential to see an oversold market and excessive pessimism.