Stocks Rebound. Markets are Back on Track…Not So Fast

12 May

Volatility consumed U.S. markets last week. We witnessed the Dow Jones Industrial Average plummet nearly 1,000 points. Traders were stunned as technology glitches sent some company’s stock prices haywire. But, for the past several days, volatility has been working in investor’s favor. Three straight days of gains. Yes, this rebounded much of the losses experience last week, but is the market completely back to original levels? Are we back on the Bullish track? Has the storm passed? I vote no.

The central cause of the gains was news of a $1 trillion plan to contain the European debt-crisis. The European Union, essentially Europe’s form of the FED, awarded much of the money to Greece. Greece’s severe debt is considered the root of the  European financial crisis.  Accordingly, it has become the target of the EU’s quarantine plan. Announcement of the plan sent the Euro, which has depreciated of late, up to $1.30. The Dow Jones Industrial Average rose over 400 points — its biggest bounce in over a year.

Despite the recent up-trends and excitement, I find myself skeptical of the overall global market. Much of my speculation comes from the myriad of potentially market-upsetting events that still need to play out. The British Petroleum (BP) oil spill in the Gulf of Mexico continues to be an issue. Numerous market sectors could be affected by the spill’s pollution. The restaurant industry, most notably Darden Restaurants Inc. (DRI), is worried that fresh shrimp needed at its Olive Garden and Red Lobster branches may be in shortage. The 3,850 square mile spill could also significantly impact the tourist industry of Florida’s Paradise coast as the summer vacation season kicks off. Not to mention, the BP oil spill has likely caused irreconcilable environmental damage across the Gulf Coast region.

Goldman Sachs (GS) remains a distracting situation as well. A criminal investigation is being carried out to determine whether the financial institution committed securities fraud in connection with its mortgage trading. The case brings to light just how far some individuals will go to make profits. In this instance, it appears ethics took a backseat to the object of money. Those GS guys are smart, too smart. But regardless of one’s intelligence, one simply can’t sell imaginary products to clients then immediately bet against what was just sold (simplification).

Couple these events with ongoings of the terrorist plot in Times Square, Volcano Eruptions in Iceland, and the seemingly forgotten War in Afghanistan and an extremely unpredictable/spasmodic market comes into view.

Of all these, the European debt crisis surely holds the most influence over global stock indexes. The temporary relief it lends Europe provides comfort for investors now, but experts contend the European Union’s plan will lead to even greater unmanageable debt in the long-term. The problems have not been cured immediately. Health will gradually reenter the European markets.

In no way with my claims am I suggesting these events are brewing a colossal economic meltdown. I do believe these affairs are preventing markets from continuing their bullish trend. I expect an inconsistent string of up-and-down jumps by the markets in the near future. Look for stocks to trade sideways. I think high volatility will persist until these stories reach some resolution.

And remember everyone, earnings season is upon us. I think one sector in particular will outperform street expectations as it continued to ride the wave of market recovery experienced earlier this year. I’m talking bout tech! Buy on earnings reports.

Happy trading,

Dan

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3 Responses to “Stocks Rebound. Markets are Back on Track…Not So Fast”

  1. Nelson May 19, 2010 at 6:49 AM #

    If you noticed, several stocks sold off IN SPITE OF earnings that beat expectations. This is a signal of a market top. It seems equities are rotating from strong hands to weak ones. Bullish sentiment is at historical highs and mutual fund cash is at record lows — two more signs of market tops. The market quits going up when you run out of buyers and it seems that we are nearly there. The only buyers now are non-professionals who think that they are clever “buying on the dips” and those trying to find a relatively safe place to invest while fleeing the looming disaster that is socialist Europe. Once these late-comers also figure out that US equities are overvalued, all bets are off and stocks will plummet — tech included. Treasuries on the other hand will rally as yields dive in a flight to safety stampede.

    How do you expect health to return to Europe, gradually or otherwise? Virtually all of Europe suffers from a growing population of retirees with generous pensions and national healthcare and a rapidly shrinking base of employees in the private sector to tax to pay for it. It’s one thing for banks to get bailed out, it’s quite another for the world’s largest economy to have a fiscal crisis as entire governments collapse under the burden of overly generous social programs and a demographic time-bomb without a solution. The austerity programs that the IMF will impose on Greece will cause their economy to shrink dramatically (thus the riots). If other PIIGS follow, governments and the banks that lend to them will fail and the impact will not stop at the European border; it reverberate around the world. Then who bails Europe out? The US?

    We are creating our own bailout/entitlement-fueled debt bomb that is getting worse by the day. Debt is projected to double within a few years even under the consistently over-optimistic forecasts of the current administration (remember how healthcare reform was supposed to save money under their rigged accounting and now the CBO is saying that it will actually increase the deficit by over $100Bn?). Borrowing to stimulate the economy in a fit of Keynesian economics only works so long as it’s relatively short-term and you can eventually pay back the money (and your creditors believe it). If our economy slows in response to contraction in Europe and a strong dollar that limits exports, do you think we still look like a good risk? Do you think that China and Japan will lend to us forever so we can use the money to bail out the EU?

    • "Mike the Apple Man" May 20, 2010 at 1:16 AM #

      I think analysts often set expectations on the low end – so that more companies beat expectations, which hopefully would result in upswing for the stock. Many people believe this, so beating expectations can become… expected, and priced into the stock. Especially when lots of companies beat expectations, as we saw this last earning season, it almost becomes boring, unless a company DESTROYS expectations.

      How do I expect health to return to Europe? The same way economies have always grown – innovation, major economical and technological revolutions led by the private sector.

      I agree with you, debt in America is a serious issue, and one day we will regret blowing off this issue. Something needs to be done, but anything that would quickly change our deficit to a surplus would be drastic, and no political administration likes to or has the leeway to make drastic changes so quickly.

  2. Nelson May 29, 2010 at 11:11 AM #

    The phenomenon of the “whisper number” for what the market really expects earnings to be is well-documented. Earnings have to meet or beat that number for stocks to react positively; however, one would generally expect the market to continue to climb if most companies are beating posted analyst estimates handily. It didn’t.

    Productivity improvements are a very important part of economic growth, the other part being expansion of the population/workforce. However, Europe has consistently had lower productivity (and overall economic) growth than the US and it is unrealistic to expect them to suddenly expand productivity more than 1.5%/annum. This is especially true when you consider that their public sector is growing faster than the private sector. Milton Friedman won his Nobel Prize in economics in part for showing that for every job “created” by government, it costs the private sector about 2 real jobs.

    Below is a link to an article that I find myself very much in agreement with. It goes into more detail re: govt debt and demographics and what will likely happen next:
    http://www.businessinsider.com/six-impossible-things-2010-5

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