"Contagion is becoming more of a threat as equity markets fall below key support levels. As losses accumulate, leveraged investors have the potential to trigger margin calls or internal risk levels. Hitting these thresholds requires additional selling to raise cash levels. In a contagion environment, risk assets can be pushed lower regardless of fundamental strength, based simply on the fact that managers have to liquidate positions.
This type of selling pressure can become especially intense when the end client (retail investors in mutual funds, pension investments with asset managers, etc.) begin reducing their allocations to different managers. Investment losses coupled with redemptions can lead to sharp trading dislocations.
Up to this point we have only had small glimpses of contagion. But as economic concerns rise and the Fed makes it clear that QE3 is not coming anytime soon, contagion becomes a much more immediate threat.
Heading into the week, we’re still sitting on a relatively full boat of bearish positions. During the past few weeks, we have tightened risk points to lock in gains, we have taken half profits on some key positions, and we have added horizontal and vertical exposure to areas that are particularly vulnerable..."
at http://seekingalpha.com/article/274625-warning-contagion-risk-ahead?source=feed
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