*******************************************************************************************
May 23, 2010 .. Market Correction Arrives …STP-097
*******************************************************************************************
Basic Data for the Week Ended: .May 21, 2010
Item ……. ………….Recent Lo … Change from ….. YTD Change
Recent Hi
DJI Ave: >>.>..>>> 10,068 ………..- 10.1% …………..- 3.5%
NASDAQ: ……………2204 …………- 12.9% ………. - 2.9%
Oil (NYMEX): ……..$68.0/b ………- 15.0% ………… -13.3%
Gold (COMX): ….$1,176/oz ……. - 4.2% ……………+ 7.4%
10-Yr T-Bd Yld:…. 3.202% ….. ..- 0.57% ………… - 0.63%
Euro: ……………….$1.220 ………- 9.7% ………….. – 14.8%
>
Last Weeks Activity
On Thursday, May 20th, the DJI Average closed at 10,068, down 376 points for the day. As shown above, that level marked a decline of 10.1% from it’s closing high of 11,205 a month earlier. In a similar manner, the NASDAQ Composite was down -12.9%. Most analysts view these results as a bona fide market correction. Like many corrections, the decline has been swift, surprising, and nasty.
Nor has the decline been limited to the equity markets. As seen by all the red figures above, oil, gold and other commodities have also declined significantly. For well publicized reasons, the real culprit in the general selloff is the Euro — down almost 15% since the beginning of the year. All of this aversion to risk has created a sharp rise in prices of US Treasury bonds and a corresponding drop in yields. The yield on the 10-year bond, for example, reached a new low of 3.202% at the end of the week, after heavy buying activity. In just a few weeks, 10-year Treasury yields have declined by an amazing 57 basis points (0.57%) as investors seek the safety of US Treasury bonds.
Now What?
The big question now is: “How much further will the markets decline? Is this the bottom and will the markets rally from here? No one really knows, of course. The key to the puzzle is still Europe. The European Bloc nations must get their act together and re-build confidence in the Euro and the entire European economy. It will not be an easy task given the years of borrowing and excessive spending.
On the plus side, as we mentioned last week, the US economy is steadily improving and 3.0% GDP growth is still the forecast for this year and probably the next. In addition, Asian economies such as China, India, and South Korea , and Brazil, are still expected to provide solid GDP growth. Blending everything together, there should still be ample economic growth on a worldwide basis, even with the economic problems of Europe. The markets are currently trying to assess just what that growth is likely to be.
Short Term Expectations
Market volatility is likely continue over the next several weeks. The stock market is probably oversold and a short, sharp rally is possible. However, the market probably needs more time to sort out the economic realities and determine it’s next true direction. This will probably be become clear in the next several weeks. From a technical standpoint, if the market does rally from these levels, a re-test of the 10,068 low is needed to confirm if the market correction is over or not. Therefore, we would not be in any hurry to commit new buying to stocks at this point. We think it best to keep some cash in reserve, be patient, and wait for the market to point the way to it’s next major move.
StansTake on Today’s Markets
Tuesday, May 18th, 2010*******************************************************************************************
May 18, 2010 ………. Market Snapshot ………STP-096
*******************************************************************************************
Basic Data for the Week Ended: .May 14, 2010
1 Mo Change ………YTD Change
DJI Ave: 10620 ………………….- 3.6% ……………. + 5.5%
NASDAQ: 2347 ………………… - 5.4% ……………..+ 3.4%
Oil (NYMEX): $71.6/bar ………- 13.9% …………… – 8.7%
Gold (COMEX): $1,227 ……….+ 8.0% ……………+ 12.1%
10-Yr T-Bond Yld: 3.44% …….- 0.33% …………. – 0.39%
Euro (in US $): 1.238 …………..- 8.4% ………….. – 13.5%
Recent Activity
>
Ever since the “flash crash” on May 6, 2010, when the DJI Average dropped almost 1,000 points in about ten minutes, world markets have shown greatly increased volatility. As measured by the popular VIX index, volatility recently rocketed up to over 40. It closed on May 14th at about 31. (A reading below 20 is considered “normal”, i.e. — not very volatile.)
The cause of the confusion and the chaotic markets we are witnessing is the ongoing European debt crisis. The pessimists feel that the debt problems of Greece, Portugal and Spain may be contagious to the other members of the European Financial Community. These problems could stymie GDP growth in Europe which, in turn, would affect world economic growth. All of this is reflected in the steep fall of the Euro — now down about 13% against the dollar since the beginning of the year. See table above.
Investors in the optimistic camp feel that the $1 Trillion commitment made a few days ago by the European Bloc nations and the International Monetary Fund (IMF) will do the trick and stabilize the European economy. In addition, they point out that the U.S. economy, still the world’s largest, is on track for economic recovery in 2010 and beyond. The clash of these two investing factions, plus the large amount of high-frequency trading done today, is causing all the confusion and greatly increased market volatility.
>
Source: Yahoo! Finance
Short Term Expectations
>
High market volatility is likely continue over the next several weeks. More economic data is needed to flip the Fear vs. Greed balance in one direction or the other. The DJI Average appears to be caught in a broad trading range between 11,200 and about 10,400. (See DJI chart above.) These are the key levels we will be monitoring to determine if a nasty correction of 10% or more is likely or rather a resumption of the 14-month long bull market.
>
Intermediate Term Expectations
Beyond the short term, we expect that market volatility will decrease as we enter the quieter summer months just ahead. The huge, $1 Trillion European bailout has purchased needed time to stabilize the European markets. In the meantime, the driving economic engines of the U.S., China, Brazil, and India will continue to provide steady, forward economic momentum. These countries currently have expected 2010 GDP growth rates of about 3%, 8%, 5%, and 6%, respectively. As a result, we envision that the DJI Average will break out of it’s trading range on the Upside in the next 2-3 months and continue it’s bull market run well into 2011.
Tags: Market Comments, Stock Market Outlook, Stock Market Today, Today's Market
Posted in Finance, Stock Market | No Comments »