Stocks Plunge As Contagion Fears Spread

Friday, May 07, 2010
Stock Market Commentary:

Stock markets around the world plunged this week as concern spread that Greece’s debt woes will spread to other countries. Volume surged on both the NYSE and on the Nasdaq exchange which illustrates heavy distribution from institutional investors.  Decliners trumped advancers on both major exchanges as the major averages plunged below important levels of support and their well defined one year upward trendlines. New 52-week lows outnumbered new 52-week highs on the NYSE and on the Nasdaq exchange for the first time since February. Waning leadership has been evidenced by the recent lack of stocks making new highs as the rally came under pressure.      

Correction Begins; Stocks Tank:

On Monday, stocks rallied after news spread that the EU and the IMF will bailout Greece. The news sent the EU plunging as fear spread that other EU nations will also need assistance. In the US, billionaire investor, Warren Buffett defended Goldman Sachs Group Inc. (GS) at his annual shareholders meeting in Omaha. Last year, Buffett invested $5 billion in the investment bank and said the bank should not be blamed for losses on lousy mortgage bets. The major averages fell into a correction on Tuesday after the NYSE composite sliced below its 50 DMA line on heavy turnover and the euro plunged to a fresh 14-month low.   On Wednesday, stocks edged lower sending the benchmark S&P 500 and tech-heavy Nasdaq exchange below their respective 50 DMA lines on heavy volume.

Dow Plunges -1000 Points; Major Averages Violate Support:

On Thursday, the European Central Bank (ECB) held interest rates steady at a record low of 1% as the Greek parliament approved austerity measures demanded by the EU and the IMF. Shortly after the Greek parliament approved the measures, around 2:45pm EST, the Dow Jones Industrial Average plunged nearly –1000 points before rebounding nearly 700 points to close down -347 on the day. The aggressive sell off breifly sent all of the major averages below their respective 100 and 200 DMA lines before a late day rebound.    

That was the Dow’s largest single day point decline in history which reiterates the importance of raising capital when the market (M criteria) enters a correction. Even after the rebound from the intra-day lows, the Dow plunged on heavy volume as fear spread that the EU may collapse if other European countries fall behind on their debt payments. The euro tanked to a fresh 14-month low as gold topped $1,200 per ounce which suggests investors are moving away from so-called risky assets and into higher quality names. Stocks were trading all over the place on Friday after the government said US employers added +290,000 jobs last month as the unemployment rate rose to +9.9%.  

Market Action- In A Correction:

The market is currently in a correction which, according to historical precedent, suggests 3 out of 4 stocks will follow the market lower until a new follow-through day emerges. That said, taking the appropriate action on a case-by-case basis with your stocks prompts investors to raise cash when any holdings start getting in trouble.  It is also important to note that the major averages have experienced multiple “corrections” since the March 2009 lows and each one has been mild at best (less than a -10% decline from the recent high). Therefore, it will be very interesting to see how low this correction goes before the bulls show up and defend support (if that happens).

Additionally, it is important to note that the market can go much lower (or higher) than anyone thinks; so it is of the utmost importance to filter out the “noise” and carefully analyze price and volume for the best read on the health of the market.

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