Stocks in Trouble…and It’s Not Over
The signs point to more troubles ahead.
The stock market is in bear market territory for small-caps with the collapse on Thursday. There were several technical breaks materializing on the broad-based heavy selling. The small-cap Russell 2000 is a mess, down 17.89% this year and 25.46% from its 52-week high. The S&P appears to be heading towards support at 1,100. The downside risk is extremely high given the death cross on the stock index charts. When stocks traded at this level before, we saw buying support surface. Watch to see if it happens this time around.
There was a negative reaction following the Fed’s widely anticipated “Operation Twist” strategy, which was as expected and really nothing to get that excited about. The Fed expressed serious concern towards the U.S. economy, and this is obviously not good. We have known that the U.S. economy was in deep trouble. How can you not when the unemployment rate is over nine percent and there is only about one job for every four applicants?
The Fed will try to influence the longer-term financing rate by shifting its bond holdings. Operation Twist will see the selling of short-term bonds, replacing them with around $400 billion of long-term debt to try to drive down financing rates and help the housing market.
I’m not convinced that this will work and feel that the economy will continue to face hurdles, including soft jobs creation. The Fed admits that the economy is in serious trouble and is clearly scrambling to jumpstart activity. Interest rates are expected to stay low until at least mid-2013. The reality is that mortgage rates have been low for some time and this latest move will likely not make a lot of difference.
The U.S. could possibly move into another recession. Investment guru George Soros believes that the U.S. is already in a double-dip recession. In addition, the global economies are also at risk, especially in the damaged European economies with their massive debt. Greece will default if it cannot convince lenders to advance it a second round of capital.
And in Asia, China’s manufacturing sector contracted for the second straight month. Slowing in the U.S. and Europe is driving down the demand for Chinese-made goods.
A sector that is in significant trouble is the banking industry. Moody’s just downgraded the Bank of America Corporation (NYSE/BAC), Wells Fargo & Company (NYSE/WFC), and Citigroup, Inc. (NYSE/C). Banks in Italy have also been cut. The International Monetary Fund also warned on European banks. This is not a good sign given that banks have traditionally provided leadership.
Bellwether FedEx Corporation (NYSE/FDX) cut its full-year estimate due to the global slowing. FDX is a play on the global economies, so this is not good.
And now as the end of the third quarter nears, the upside for stocks will likely be limited unless there are new catalysts surfacing to drive the buying.
Gold and silver continue to be the places to have money, especially the miners that have trailed the superlative upside move in gold towards $2,000. Buy the miners.
At this point, you should hold steady and avoid chasing any stocks. Buy put options to help hedge against more potential losses. You can buy the SPX or SPY for broad market protection or can focus on tech with QQQ and small-caps with the ProShares UltraShort Russell 2000 ETF (TWM).
Be careful and remember that maintaining your capital will allow you to trade longer-term.
Gold and Silver? Did you see what happened on Thursday and Friday?
Take stocks for long term...The market is crazy at the moment because most people are selling their stocks whenever stock prices fall.
this is the perfect opportunity.. but you have to bide your time.. when things go belly up in Europe, you will see hedge funds that are leveraged to the hilts go belly up, their holdings will come flooding to the market as they get margin called.
Patience.. hold cash and wait.
Or you could buy into the market now as valuations are attractive across the board.. but you have to know whether you will have the conviction to average down when the shit hits the fan.
I've bought recently and will continue to hold my nose as I average down.
I'm strictly trading volatility ($TVIX) until I believe the markets hit a bottom. You get positive roll yield of roughly 6% per month right now in addition to just swing trading the ups and downs.
Can you please elucidate a little more on your trading strategy. Thanks!
This guy writes some great articles on trading volatility-
http://sixfigureinvesting.com/blog/
Read posts from the past few months to get a better idea of strategies. Roll yield is normally negative for VIX ETF's, but with the extended period of high volatility futures contracts have been in backwardation for a while.
Full disclosure: I'm still banking on volatility turning around (before the end of last week futures had dipped into contango briefly) and am long XIV, an inverse VIX ETF.
I rarely post on this site, but I am sick of people talking their book on gold and silver. I'm at work right now so I won't post anything lengthy, but its a bubble and its not a safety net.
I don't see how it is a bubble, what will cause it to burst, our economy recovering? It has been undervalued by an abundant money supply...now we are finally getting to its true value and just wait til Euro dumps.
I think most people on this site know that gold and silver are bubbles waiting to explode. It is a bubble you can still make a pretty penny or two off of though.
Explode upwards or implode downwards because i see 50+ comming
Duff, if you don't mind be asking, what's your cost basis on XIV? I think it's a good play when the dust settles as the VIX will eventually revert to its mean of around 20 but the one problem in the short-term I see is compounding decay. If the VIX keeps spiking and retracting, XIV will be lower then it was previously.
At some point, XIV will be too cheap to ignore, but right now it almost seems like catching a falling knife to me. TVIX (or VXX for the less ballsy) is almost like betting on global political/economic ineptitude. Choose your spots wisely, ride the wave for 3-6 days at a time, and get out before "good news" causes a market rally for 3-6 days. Just can't be too greedy.
Wallmartshopper,
I'm going to try to address this, although you'll have to forgive me, my experience lies in quant data analysis in consumer lending, not investing. Here are my thoughts philosophically though, for what their worth:
Gold is not an income earning asset. It does not pay a dividend, it cannot create value nor does it pay interest. So what warrants a higher price of gold?
Since the price of gold is dollar denominated, inflation would warrant a higher gold price. Inflation would also warrant a higher price for everything else though, including stocks. GLD has recently outperformed stocks I think I read somewhere like 4 to 1, and I'm pretty sure that's a record. Perhaps we have inflation without the price of stocks being worth any more? But would that warrant a massive increase in gold's price? Attributing gold's price to inflationary forces would be like saying the dollar lost over 1/2 its value in 3 years. Disagree here.
So if its not inflation, what else is driving gold higher? Demand for gold as a consistent safe haven? Lets say every other asset class drops in value, whereas gold maintains its safety status. You would essentially be predicting a massive depression. And if things really hit the fan globally, I'm not sure gold would be on the list of my hierarchy of needs. Its a luxury good, it is not food, cloth or any sort of commodity that an individual would pay more for if under financial duress. PS: If the euro tanks, I'd rather be in USD.
Point 3 might be a touch farfetched (I've heard the argument before that gold is not a a safe haven because you can't eat it and acknowledge it is a layman's argument). But with 1-3 considered, I really think gold is a 'bigger fool's' bet. You buy gold hoping that others will fear the coming day of doom more than you and will pay you more for it. And over the past year there have been a lot of fools, IMO.
A side point: I think another indication of a bubble is when companies melt down a finished product (rings and jewelry, ie cashforgold.com) and turn it back into the raw material to get a better price. Its like the market is saying, "I couldn't find a buyer for a gold ring (and ebay should make that a decently liquid market), but I sure can find a buyer for gold as a commodity."
Another side point: Gold ETFs give people the opportunity to bet on gold more speculatively. Price swings I would expect to be greater.
So that said, I welcome anyone to critique this philosophy, as I view WSO as a great place to learn and accept feedback.. About myself, I'm a few years out of school and an avid reader of value investing literature as my only investing credentials. And my experience is not in commodities: I have made good money in the past year or so buying puts on the absolute garbage tech stocks available to the market. Puts on TZOO at 70 was basically arbitrage,and I'm hoping CRM's next, but that's for another post.
Flow, it is a very basic global macro short-term trading strategy predicated on the collasal ineptitude of global monetary/fiscal/political policy as a whole. Me being a huge cynic also plays into it.
Nobody is really making an effort to fix the Euro crisis or the American crisis. Germany doesn't want to bail out Greece, Italy or Portugal. The markets "rise" on bullshit news about "the potential for progress" to correct euro-zone troubles. Then they fall a week later because of a "lack of progress" and "concern of default." It's all BS. It's all manipulation. You can either cry about it or learn to make money off of it.
Since August 1st I've bought and sold TVIX 5 times, profiting every time and rolling the profits into my next trade. Right now I am seeing a safe bet to buy in when the VIX drops to around ~31 and sell when it reaches above ~40. The markets have been rising and falling for roughly 4-6 days at a time in either direction. Yesterday I told TVIX at $81 (VIX @ 41) and it is trading at $66 right now (VIX @ 35.8). Even with the VIX dropping, TVIX has been making higher lows of $35 on Aug 15th, $48 on Aug 29th and $55 on Aug 16th. If my math is right, that will give me a new entry point between $59-62.
I am 24, have nothing to lose and want to retire rich. So I have been investing 100% of my portfolio into this strategy and rolling the profits into subsequent trades. I'm up 150% in a little under 2 months.
Eventually the VIX is going to revert to its mean of around 20, and I will have to be careful to not get caught with my pants down, but I believe I have at least another 3 months of trading this vehicle exclusively. Greece has $5billion in bonds coming due in December which they aren't going to make good on.
If you want to know more send me a PM.
now these day stock market are going to well direction.
Totes.
Indian stocks were trading partially lower amongst movements, considered down by auto, metals and capital goods stocks. However, the rise in technology, private banks and healthcare stocks has limited the downside.
Nifty to breakout on the benefit from the present dealing range.The industry is providing symptoms that they are willing to go up rather than go down.
The US markets started the first day of Nov with over 1% profits as Walls Street cheered a set of better-than-expected financial reviews.
Indian shares gained somewhat strength amid choppy trade and weak Asian cues. U.S. stocks closed higher Monday, as investors await the outcome of an uncertain U.S. presidential election.
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