Much will be written and TV commentators will talk endlessly about today's dramatic market plunge, so what can I possibly add to the conversation?   Well, by now the facts are well known, so how a brief recap followed by some observations.  First the recap: right in the middle of an orderly fear-driven selloff in the sever but not unprecedented range of 3%, some some trading anomaly drove the Dow down 1000 points, or about 10%, and then snapped back within minutes.  It is remarkable that even after the SEC, CFTC,  and the major exchanges studied the trades into the evening, they still don't know exactly what happened.  This is clear from the arbitrary remedy of cancelling all trades with a more than 60% price drop, rather than identifying specific trades to break.  You can also tell from the fact pattern that it wasn't triggered by a single mistake, like a scaled up trade order for a single stocks (think billion instead of million), as had originally been reported.  There were too many individual stocks involved.  If only it were that simple.

In spite of ragin' contagion and related fears of a credit market freeze, stocks shouldn't have fallen so far so fast, and if they did, they shouldn't have come back so fast.  It seems pretty clear from the steep V price pattern  that some form of algorithmic trading drove stocks into brief air pockets of no buyers.   However, the authorities and the exchanges can't explain exactly what happened.  The role of equity futures and cash futures program trading is also unknown at this time.  Either many algo traders were targeting the same stocks at the same time, driving sell orders into a illiquid environment, or momentum driven trading strategies went into overdrive as downward price momentum accelerated, or a combination of both.

Now the observation: Regardless of the exact cause, what we are seeing is an example of complex system interacting in unpredictable ways.  The system consists of traders and computers, trying to digest an impossibly complex set of macro and micro conditions.  Even though the system isn't new, today it behaved in a new way and produced a previously unobserved result.   Hopefully, we'll learn alot about the system, the interactions, and the result in the next few days, and that knowledge will make the system safer.  And two more observations: 1) while it appears to be an anomaly, it just be the first occurrence of a systematic result; and 2) while the regulatory authorities and the exchanges don't know exactly what happened, you can be sure some hedge funds and traders were also working late, and some of them may know exactly how it occurred.  In fact they may be positioning themselves to make profits if it happens again.

One thing is for sure: until we understand what happened, investor confidence will be further eroded creating yet another feedback loop in the system

The word of the day Wednesday was "CONTAGION", and while we have heard it quite a bit lately, it was publicly uttered by European Central Bank official Axil Weber, commenting on the spreading European debt crisis, and quickly became widely quoted in news services around the world.   Attention was focused on European debt contagion above all else as stocks and commodities fell, the dollar rose against the Euro, and Eurozone credit spreads continued to widen.

For the day, the MSCI World Index of stocks dropped 1.2%, falling into negative territory for the year; the S&P 500 dropped two-thirds of a percent to 1165; the Dow was down half a percent to 10868; and in Europe Spain's IBEX fell 2.3%.   In Japan, investors came back to a rough market after being closed for a three day holiday, and the Nikki 225, catching up with world events, sank over 3%.  The Euro dropped as much as 1.4% against the dollar during the trading day, crossing the psychological and technical barrier of 1.3, before recovering partially to close at 1.2825, and the Euro dropped by the same magnitude against the pound. Oil dropped below $80 per barrel and nickel slid 11 percent; while the US and German treasury yields fell in a flight to safety.  The spread between Greek and German 10 year bonds widened to 731 basis points, a record in the data going back to 1998.

Turning back to the US, Wednesday's drop added to Tuesday's 2.5% air pocket, even as the domestic economy showed continued signs of improvement.  The Consumer Staples and Health Care sectors had slightly positive returns for the day, with all other economic sectors down, the worst being energy, which fell 1.5%.  The ISM non-manufacturing business index held at a four year high of 55.4 for the second consecutive month, and and ADP labor report showed that 32000 jobs were added in April.  Meanwhile the CBOE Volatility Index, or VIX, oft discussed on this call, rose for the second day to a three month interday high of 24.9.  The long-run average level of the VIX is 20, and it reached an all time high in November 2008 of 80.8.

Oil, which closed Friday 86.15 per barrel, is now below $80 on the strong dollar and fears of slower economic growth.   More generally, the Jefferies/CRB index fell 1.3%, after dropping 2.3% on Tuesday, for a two day drop of 3.7%.

The human side of the debt crisis was brought out yesterday, as Greek protester against austerity set a bank in fire, resulting in three deaths. 

Moody's signaled it may cut Portugal's credit rating to Aa2.   This follows last weeks actual downgrade of Spain by S&P of one notch to AA. European Bank Debt CDS rose to a one year high of 154, and CDS for Portugal surged 85 basis points to a record 429.

In Australia, the government floated a plan to increase taxes on mining profits by 40% after 2012, which caused global mining stocks to be hit and several mining companies, including Rio Tinto, to publicly state they would put some development plans on hold.

 For today, we'll be looking for initial jobless claims, and continued earnings reports, which will hopefully take the focus off the European debt crisis.

The  US stock market finally buckled today under the weight of constant European debt contagion worries, which may indicate that market psychology is rolling over since the market didn't show the resilience to such events we have seen over the last few weeks. The fact that the deal was done over the weekend - sooner than expected, and was larger than expected, did not save the Euro from getting hit or calm the market.

Familiar talk of a slowdown in China and concerns about terrorism added to investor angst and new mining taxes in Australia hit the global mining stocks.  Tonight the global rout is continuing in Asia like a stadium wave.

Black Swans continue to show up in the investing pond.  Just in the last few weeks we have had an unprecedented shutdown of the European airline industry from - who would have guessed it - a volcanic ash cloud, and the explosion, sinking, and unfolding environmental crisis of the Deepwater Horizon offshore oil platform.  The offshore oil gusher is sure to further complicate the already complicated situation with energy legislation in the senate which is coming to a head in the next few weeks.