Global Markets Plunge As Risk Off Trade Accelerates

SPX- Violates 50 DMA Line

SPX- Violates 50 DMA Line

Wednesday, December 14, 2011
Stock Market Commentary:

Risk assets continued to fall on Wednesday after fear spread that the global economy is slowing and there might be more trouble in Europe. From our point of view, the market is back in a correction as the latest follow-through day (FTD) failed after the benchmark S&P 500 sliced below its 50 DMA line. This is just another example of how erratic markets have been of late. The global macro picture is deteriorating which is not ideal for U.S. stocks. Remember our mantra: Remain flexible in your approach and never argue with the tape.

Global Markets Plunge & More Bad News From Europe

On Wednesday, U.S. stocks and a slew of other risk assets (gold, copper, oil, etc) plunged as fear spread that the global economy was headed for a double dip recession. Since 2008, the global economy has rebounded but the rebound has stalled (or stopped, depending on your vantage point) in recent months. This fear has caused a tremendous amount of volatility in global markets as investors are concerned with more downgrades out of Europe and then another global recession. Yields on Italian bonds surged on Wednesday which is not ideal.

Global Macro Picture Continues To Deteriorate:

We find it very disconcerting to see other (leading) risk assets fall to fresh 2011 lows in recent week/days. China’s Shanghai Composite (normally a leading risk on/off indicator) has fallen below its October low and hit a fresh low for the year! The euro, which is strongly correlated to U.S. stocks and other risk assets also took out its October low on Tuesday, December 13, 2011 which is not ideal. Meanwhile, Gold sliced below its longer term 200 DMA line on on Wednesday (12/14) for the first time since August 2008 (1-month before Lehman failed). Other risk assets such as Oil, Silver, Copper, etc are also under pressure which suggests the global risk off trade is getting stronger.  As an easy reference point, if the benchmark S&P 500 would simply fall to its Oct low, that would be 1074! Sometimes, caution is king.

Market Outlook- Correction

The benchmark S&P 500 (SPX), Russell 2000, and Nasdaq composite are all back in negative territory for the year which is not ideal. Meanwhile, the Dow Jones Industrial Average is up slightly for the year (~2%). For months, we have argued in this commentary that from our point of view, the current EU bailout plan- to use leverage & add more debt to a debt crisis- is foolish at best and does not address the broader issues (i.e. the other PIIGS countries are broke). Recently, others are beginning to take notice. However, our job is to trade on what we see happening, not on what we think will happen. We do this by gathering the facts, interpret how the markets react to the news and trade accordingly.  What we have seen from the October 4, 2011 low was simply an over sold bounce into a logical area of resistance (200 DMA line). Looking forward, this sideways action should continue until either support (1074) or resistance (200 DMA line) is breached. Therefore, we have to expect this sloppy wide-and-loose action to continue until the market closes above its longer term 200 DMA line. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!

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