I thought the Dow would close flat last night - so was suprised to see it shed about 127 points at the close pusing the Dow to 10066.6.  The intra-day chart below shows that the bulk of selling came toward the end of trade.

The reason for the late sell off was apparently CajarSur - a small Spanish bank owned by the Catholic Church with a history of more than 150 years.  Its President, a Catholic Priest stepped down last week when merger talks broke down.  Let me put this bank in some perspective - it accounts for about 0.6% of the Spanish banking sector in terms of assets and has troubled loans of about Euro 2.2bn.   It has about 3000 employees and 474 offices mainly in the region of Cordoba - which itself only has a population of 320,000.   Apparently the reasons behind the failed merger/rescue talks were personality and retrenchment driven - its suitor or white knight was Unicaja.  I think more mergers are required to strengthen the Spanish banking system but Bank of Spain's rescue of CajarSur is to me blown out of proportion.

The VIX is still above 30 but fell last night despite CajarSur.... to the 38 level.

I still maintain the view that this weakness and volatility regarding problems with the PIGs should start to ease by the end of Q3-2010.  I am comforted by the improving US economy, robust corporate earnings and undemanding stock market valuations for the US and even Asia.   The other important point to note is the very low volumes - which increases the volatility as many investors are sidelined.   I think medium term investors can look to nimble value and yield stocks over the next three months bearing in mind volumes will be low.  However, if this is done on a six month view, I believe these investors will be rewarded with positive gains by the end of the year.