Stock Market Cliff | Bear Market
Last week was a horrible week for markets and it ended on the worst day of the year in 2012. It is very bad fundamentally from a Europe debt and currency standpoint and from a slow growth and double dip recession view. Spain and Greece are in deep trouble and there don’t seem to be any strong and practical solutions coming forward anytime soon.
And, it is also in a very bad state based on the charts using technical analysis. Whenever a market loses more than 10%, it is a bear market by our standard. The S&P 500 has now lost 10.5% from the high on April 2, 2012. It is also extremely bearish when the markets close below their 200 and 250 SMAs. That happened on Friday on all 3 major US markets. The heavy selloff was fueled by a terrible US jobs report. The Labor Department reported the U.S. added a paltry 69,000 jobs last month falling well short of estimates calling for an increase of 160,000. The unemployment rate moved up from 8.1% to 8.2%.
The only ray of hope this week is that there is typically a bounce around these moving averages on the first level test so a few bulls may be lurking in the short term. However, if the markets close this week without the ability to get any buying above the 200 and 250 SMAs, then a repeat of the steep summer drops from 2010, 2011, and maybe even 2008 are likely and can’t be ruled out. From our studies in technical analysis, breaking through these 2 key moving averages can be like dropping off a cliff with quick and heavy selling pressure.
The Europeans are simply moving way too slow for investors. A big European meeting is happening at a June 28-29 EU summit, but that may be too late. German Chancellor Angela Merkel is now pressing for a central authority to manage euro area finances, and major new powers for the European Commission, European Parliament and European Court of Justice. She is also seeking a coordinated European approach to reforming labor markets, social security systems and tax policies. Until states agree to these steps, the officials say Berlin will refuse to consider other initiatives like joint euro zone bonds or a “banking union” with cross-border deposit guarantees. That kind of strong and unreasonable stance just won’t work for the markets. Finally, Germany’s insistence on gold bullion as collateral for supporting debt relief measures kicked off a strong gold rally on Friday.
The European politicians and the ECB need to act very soon if they want to help lessen the severity of what could be another financial collapse later this year or possibly much sooner. It is hard to predict at this point how it would compare to 2008 but it definitely will crush investors with too much equity exposure. It is not too early to start playing defense, raising more cash, and reducing equity risk.
As long as the Euro currency keeps falling and Europe has bank runs, stock markets are at a huge risk for a sharp selloff. It could happen anytime, it could involve a massive down day, and the depth could be 10% to 30% or more over the next several months if the right safety measures by the world’s central banks and funding organizations aren’t taken. Continue to RAISE CASH and REDUCE EQUITIES.
Here are the key levels for the S&P 500. More weakness this week could create a technical bounce between 1250 and 1260 but selling probably resumes after that without any positive European news.
More Selling Ahead:
MR is still looking at shorts. Here are a few more in addition to last week’s picks.
Gold and silver had strong bounces late last week and they may have higher to go in the short term. Oil is still looking for a bottom and investors can scale in on any more weakness a little at a time. The caution alert for retirement accounts and investors is still present. Selling more equities to protect from more heavy selling is prudent at this time, especially if you can take advantage of selling at higher prices during a market bounce. Make sure to be ready to sell even more in case the Euro completely unravels and takes the markets down hard.
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