Insights & Advice

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Fraught with Peril

We witnessed some panic on Friday. U.S. Investors, already concerned with events in Europe, were seemingly stunned by the decline in the jobs data. What happens next should be interesting.

Bears Rule the Day

Much of Friday’s downside action occurred within the first few minutes of the market opening. That is usually the case, leaving most investors no choice but to bear the brunt of the decline. The stock markets in Europe were already falling on their own set of economic woes when the Commerce Department announced that U.S. unemployment rate ticked up from 8.1% to 8.2% with the economy adding the fewest jobs in over a year.

This was only the latest in a series of disappointing economic numbers that indicate our stop and start economy is slowing once again. Readers may recall that as far back as April, I warned that we could see a slowing in the already moderate growth rate of the economy for a variety of reasons. It was why I advised investors to begin taking profits and getting defensive in the face of the first quarter rally.

As of today, we have basically given back the entire gains of that rally since the beginning of the year. Those who had followed my advice have booked their hefty gains and are sitting on the sidelines. That strategy has paid off.

So here we are at an extremely critical level on the S&P 500 Index. The 200 Day Moving Average has traditionally triggered a change in investment attitudes by many market participants. If the 200 DMA is broken to the downside decisively, it is usually a sell signal. If, on the other hand, the S&P moves above that level and stays there for more than a day or three, it is usually a buy signal. Today that 200 DMA is at 1,284. We are slightly below that level as I write this.

Remember that we are talking art not science, so give that theory a bit of leeway. For example, many times markets reach the 200 DMA, break down through it for a few days and then bounce back above it. So don’t go out and sell everything if over the next two weeks we find market averages stay slightly below that magic line in the sand.

Since we won’t find out the fate of Greece until after their second round of national elections on June 17th, there can be no closure around the immediate concerns of global investors. Will Greece stay in the Euro? If not, what will happen and how will that impact the European Community overall? Yes, “fraught with peril” seems to be an apt description when discussing Europe in June.

So it seems logical that markets will find it difficult to stage any kind of meaningful rally until we know what lies in store for us. Given that markets usually discount the worst in an unknown environment, I suspect that what we are witnessing right now is that discount mechanism at work. In other words, investors are selling the rumors.

That leaves an interesting possibility for what comes after the Greek elections. If traders are selling now, then usually they will buy back on the news, no matter how dreadful it is. I have often stated that markets can deal with the facts, either good or bad. But markets can’t cope with the unknown and today there are more unknowns out there than there are leaves on a tree.

We do know that Europe is trouble. We do know that economic data in China, the engine of global growth, continues to weaken and now the U.S. appears to be slowing. We also know that last year’s Fed stimulus “Operation Twist” is slated to close at the end of this month.

 I find myself looking at columns I wrote a year ago and they are eerily similar to what I am writing today. As such, it would be wise to remember that under these worsening set of circumstances last year, markets and economies declined until central banks both here and abroad announced another set of stimulus measures that sparked huge stock market rallies. It happened last summer as well as the summer before that.

I expect the same will happen again this year, which is why I advised readers to sell in April and reserve the cash. We are not quite ready to invest that money yet but we are getting close. Keep reading and remain patient.

 

 

 

 

 

Posted in A Few Dollars More, At the Market