Wolf Pack Draws Blood

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In recent weeks, various financial and political leaders in Europe have described “unscrupulous, evil speculators” as a “wolf pack” out to destroy the Euro, Greece and even the European Union. 

This week the wolf pack drew blood as the Euro fell to its lowest value since Lehman Brothers went belly up in September, 2008, and the European Union faces the very real threat of its potential destruction. 

Global markets in nearly every asset class responded violently to these problems and we’ll take a look at all of this in greater detail and talk about what it might mean going forward. 

Looking at My Screens 

Our portfolios continue to perform well as we remain in the “Red Flag” mode, expecting lower prices ahead. 

Year to date our performance looks like this: 

Standard Portfolio:  +8.7%

2X Portfolio:            -2.5%

Option Master:        +19.0% 

As always, the chart tells the story: 

 

Chart courtesy of StockCharts.com 

In the chart above we can clearly see how the S&P 500 has gotten progressively more volatile in recent days and now is well below its 50 Day Moving Average.  The 200 Day Moving Average is the red line at 1100; just less than 4% down from here which is widely viewed as the demarcation between bull and bear markets. 

In the bottom screens, MACD remains on a “sell” signal with negative momentum while the Full Stochastic appears to be curling over and generating another “sell” signal after a short climb up from oversold levels.

Overall, this is at least an intermediate correction within an uptrend, but in spite of all the fireworks, the index is just -6.4% below its recent highs and so recent action, while violent, is not too dramatic as corrections go. 

The View from 35,000 Feet 

This week’s market action saw intense volatility in all asset classes as global participants fought to adjust to the uncertainty and dangers in Europe. 

The “wolf pack” continued its attack on the Euro, driving the common currency down -3% for the week to an 18 month low and down -9% on the year. 

More bad news poured in this week as Moody’s considers downgrading Greece to “junk” which is also bad news for Portugal which holds a high percentage of Greece bond debt.  Spain and Italy are tottering on the edge, as well, and even the CEO of Deutsche Bank, one of the biggest lenders in Europe, voiced doubts that Greece would be able to repay the loans currently coming its way. 

The Euro isn’t the only currency under duress as the wolves also went after the British Pound which took its third weekly hit in a row, dropping -1.8%.   

While new Prime Minister David Cameron most likely doesn’t have his boxes unpacked at 10 Downing Street, pundits are already forecasting a collapse of his coalition government and new elections as soon as the end of this year.   

The Pound has been pounded, down nearly -3% since the Conservatives and Liberal Democrats got together to form their new coalition, and the situation has reached truly Alice in Wonderland proportions as it has become cheaper to insure U.S. corporate debt than European Sovereign debt.   

Meanwhile George Papandreou, Prime Minister of Greece, says his country might sue U.S. banks for their role in the debt crisis, (those evil speculators again) but he’ll have to get in line as seemingly every major bank in the country is under investigation for one sort of irregularity or another related to the mortgage markets.  And speaking of banks, six more failed this weekend, bringing the yearly total to 72. 

U.S. stock markets gyrated wildly in response to all this action with 100 plus or minus point moves on the Dow becoming the “norm,” while Gold reached an all time high as investors fled to the metal and (GLD) the largest gold ETF expanded its holdings to $50 Billion. 

Oil fell -4% to a 3 month low as fears of deflation and a slowing economy settled deeper while U.S. bankruptcies were up 17% year over year in the 1st Quarter and up 4% from the 4th Quarter.

What It All Means 

The contagion that seems to be spreading through Europe and around the world is an unwelcome development along to the road to recovery that seemed to be going along so well until just a few weeks ago. 

At stake is the very survival of the Euro dollar and the European Union, along with major banks around the world and the stability of global stock markets.   

It’s hard to see a good way out of this as all nations simply have too much debt and the problem has morphed from a corporate problem and a mortgage related problem into an international problem at the governmental and central bank level. 

Austerity programs or higher taxes to reduce debt will likely lead to a global slowdown and a possible double dip recession, while default or restructuring could lead to a global banking collapse. 

Europe has shot their “nuclear option” and the market isn’t buying it as the ‘wolf pack’ goes after the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) and even bigger game like the United Kingdom. 

I don’t see a quick or easy fix to any of this which means that we very likely could see continued volatility and wide swings in asset class prices. 

Without a fix to this global contagion, the likely outcome would be more downwards pressure on stocks and European currencies with corresponding upwards pressure on gold, U.S. Treasuries, Japanese Yen and other perceived “flight to safety” assets over the days and weeks ahead. 

However, in the very short term, the Euro is vastly oversold, as are U.S. markets, and so a technical bounce higher would not be unexpected.  Fundamentally, if the European Finance Ministers meeting on Monday and Tuesday can pull a rabbit out of their hats and put together some sort of credible strategy to resolve this crisis, a quick turn in the markets could be seen.= 

The Week Ahead 

This week wraps up U.S. earnings season which became little more than a sideshow with the dramatic international action and we also have some important economic reports ahead. 

Economic Reports: 

Tuesday: April Building Permits, April Housing Starts 

Wednesday: April Consumer Price Index 

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, April Leading Economic Indicators, May Philly Fed 

Earnings Reports: 

Tuesday: Wal Mart, Home Depot, Hewlett Packard 

Wednesday: Target 

Sector Spotlight: 

Leaders: Small Caps, Peru 

Laggards: Euro dollar, Oil 

It’s a quiet weekend at home and a good time to rest up for what promises to be another tumultuous week ahead.  The current situation carries enormous danger along with enormous opportunity and I look forward to continuing our work together as we seek to take advantage of the opportunities and sidestep the dangers in these fast moving markets. 

The wolf pack will be on the hunt and so will we.

Wall Street Sector currently holds positions in AGQ, EEV, SLV, VXX, EFZ, and SPY Put Options.  Positions can change at any time

All the best,                                  To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.





Posted 05-16-2010 3:54 PM by John Nyaradi
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