We Face Extraordinary Danger and Extraordinary Opportunity

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As I look across the global landscape today, I see extraordinary danger and extraordinary opportunity. 

Danger comes from the deteriorating economic environment at home and abroad and extraordinary opportunity comes from the enormous volatility and opportunities to “short” the market followed by a once in a generation opportunity to “buy dollars for dimes” once a bottom to this market has been reached. 

Over the next five years we will see more bankruptcies, both individual and sovereign, than we’ve seen in our history and we’ll also see more millionaires and billionaires created than ever before. 

As individuals we will each make one of two choices.  We can assume the “deer in the headlights” posture and stash our money under the mattress, or we can educate ourselves, take prudently managed risk and work to take advantage of the enormous opportunities that will present themselves. 

Looking at My Screens 

This week we saw enormous volatility in every asset class as global forces washed over the markets of the world and investors/traders tried to position themselves on the only side of the market that counts, “the right side.”  

The downtrend that started in April is still firmly in place, notwithstanding Thursday’s rally from oversold levels and we remain in the “Red Flag Flying” mode expecting lower prices ahead. 

Taking a look at the chart of the S&P 500 we see:

Chart courtesy of http://www.stock.charts.com 

In the chart above, we can see that the S&P remains just below its 200 Day Moving Average which will provide significant resistance while the MACD remains on a sell signal but momentum is turning up.  Above the blue 50 Day Moving Average is rolling over and the 200 Day red line is flattening which is also a bearish indicator. 

So for the time being, at least, we remain in a bearish configuration, expecting lower prices ahead. 

By the way, if you share our view and expectations of lower prices, this week’s mega rally on Thursday presented some extraordinary buying opportunities on the “short” side with relatively low risk at the moment.   

Members note that this week’s Position/Stop Loss Update will be sent on Monday afternoon due to markets being closed for the holiday weekend. 

The View from 35,000 Feet 

One thing about this period we’re living in is that there is no shortage of news and analysis for a financial newsletter writer like myself.  Every week seems to bring an almost unbelievable torrent of news and economic developments that make for a wild ride, indeed. 

This week was no different and here are some of the high points: 

1.      On Friday, U.S. equity markets were roiled when Spain’s credit rating was downgraded by Fitch Ratings in spite of the $1 Trillion bailout package recently enacted by the European Union.  (Speaking of the bailout, I don’t think there has ever been a time when $1 Trillion did absolutely nothing to mend a problematic situation.) 

2.      The Euro weakened yet again, now down nearly 20% against the dollar over the past half year. 

3.      LIBOR, the London Interbank Offering Rate is near a yearly high

4.      The month of May just ended (mercifully for most investors) was the worst month for the Dow Jones Average in 70 years.  

5.      The ECRI, Economic Cycle Research Institute reported that its weekly index dropped to a 6 month low while its yearly index dropped to a nearly 12 month low.  Both numbers show acceleration in the slowdown of U.S. economic growth 

6.      Consumer spending was flat in April which was unexpected and ominous since the U.S. consumer accounts for more than 70% of our GDP. 

7.      The Chicago Purchasing Managers Index, a broad measure of economic activity, fell in May and posted the largest decline year to date.

8.      Tensions on the Korean Peninsula continue to escalate towards possible open conflict between the north and south and joint American and Republic of Korea forces are conducting naval exercises this weekend off the coast of North Korea in a show of force in the region. 

9.      .Congress passed an $80 Billion “mini-stimulus” bill to extend unemployment benefits yet again as the job market fails to develop sufficient new employment. 

10. The Greeks are already discussing potential modifications to their planned “austerity” programs. 

And here’s a truly terrifying chart from Washington’s Blog, one of the fine blogs that I read on a regular basis:

 

 

Chart courtesy of Washington’s Blog 

This is a chart of the Dow Jones during the stock market crash of the 1930s and it doesn’t take a rocket scientist to note the eerie similarities to our world today.   

You can see how it starts with a nice run up, followed by an initial crash in 1929, then a 60% rebound that was followed by a waterfall decline, bringing the Dow to a loss of 89% before it was all over. 

As eerily similar as this price action is to current conditions, what is even more spooky is the little known fact that the second, larger decline was triggered by a credit crunch and banking crisis in Europe that began in Austria and spread to Germany.  That crisis sowed the seeds of the Great Depression and the social unrest that eventually spawned The Third Reich and World War II.

Scary stuff, indeed.

What It All Means

You see what I mean about these being exciting times in our financial world.  Any one of these items would provide sufficiently rich fodder for a weekly newsletter, but so much is happening so fast that we’re now aggregating these into bullet points and executive summaries to get through it all.

Looking over the above list we can draw the following conclusions: 

·   Europe is in severe jeopardy and any possible solution will generate further drag on the global economy, at the very least, and social and financial chaos on the outlier end of possible events. 

·   A global credit crunch is rapidly spreading like a forest fire as banks become less eager to lend and sovereign nations run into credit problems themselves. 

·   Numerous reliable economic indicators point to a dramatic slowing of the U.S. economy and the ever growing possibility of a double dip recession. 

·   Any misstep or accident along the way, like a major sovereign default or war on the Korean Peninsula, could easily trigger a financial meltdown and subsequent deeper recession or depression. 

But as I mentioned earlier, each one of these factors presents enormous opportunity, because with danger there is opportunity, and with extreme danger comes extreme opportunity. 

Our goal at Wall Street Sector Selector will simply be to continue deploying strategies and tactics designed to sidestep the dangers and take advantage of the opportunities as they come our way.   

I’m excited about the possibilities and look forward to continuing our work together towards capitalizing on these exciting times. 

The Week Ahead 

This will be another huge week for economic reports (as though we need yet another week of whipsaws and volatility) with a look at the all important real estate markets on Tuesday and Wednesday and the granddaddy of all employment reports, the Non Farm Payrolls Report, coming on Friday. 

Economic Reports: 

Tuesday: April Construction Spending, May ISM Index 

Wednesday: April Pending Home Sales, May Auto Sales,  

Thursday: ADP Employment Change, April Factory Orders Initial Unemployment Claims, Continuing Unemployment Claims 

Friday: May Non Farm Payrolls 

Sector Spotlight: 

Leaders: South Africa, Brazil Small Cap, Natural Gas 

Laggards: Oil Services, Spain, Long Treasuries 

So now a rough May is in the books and so far, at least, “sell in May and go away,” appears to be sound advice.   

This weekend we were in Carson City, Nevada, for a big swim meet with my young son.  My eldest son is home from college and so it’s nice having all four of us together again, short though it will be.   

We took a drive around Lake Tahoe which is truly one of the Seven Wonders of the World and stopped into a casino or two to try our luck and I realized how casino-like world financial markets haave become.

I hope you’ll have a great Holiday Weekend and let’s all take a moment to remember why it’s a holiday and celebrate the men and women who have died serving our country.  

We visited Arlington Memorial Cemetery last summer and saw the acres of symmetrical white markers stretching across the hillside above Washington, D.C., and our problems are nothing when compared to the families who arrive there everyday to add a new cross to that pantheon of true national heroes. 

Wishing you a great weekend wherever you may be,

John                           To get a Complimentary Special Report from Wall Street Sector Selector, click here:

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.

 

 

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Posted 05-31-2010 12:09 PM by John Nyaradi