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Stock Trading Review Of The Past Week: May 3 - 7, 2010
May 08, 2010
Whew! What a wild ride in the stock market this past trading week, May 3-7, 2010!
The decline in the major indices was a stark reminder that the global markets are essentially one local market place.
Europe dominated the financial news this week. There was a prevailing uncertainty created primarily by Worry and Fear over the feasibility of the Euro Zone.
However, in the midst of all the turmoil in Europe, there are signs of solid underpinning to the US economy.
1. Turmoil In Europe
The Euro Zone - consisting of 16 countries - is stressed: Greece is in default , Portugal downgraded.
As a result, the fear of a contagion effect has created havoc among world markets this week.
Failure to resolve the Greek sovereign solvency situation has highlighted the structural flaws of the Euro Zone to act decisively and with lightning speed when the situation warrants it.
Such actions, similar to those undertook by the US Federal Reserve Board and the US Treasury to avert an economic meltdown at the end of 2008, were exactly the remedies needed to stem the fears in the stock market.
The main flaw of the Euro Zone structure is that there is not one central government and each government has to go through its own decision making process.
This does not bode well when speed is needed.
Another European problem is that there is no clear winner in the general elections in England.
Although England is not part of the Euro Zone, it added to the mix of uncertainty. Markets hate uncertainty.
The Tori - conservatives - won more seats than any other party but not enough to form a government. They likely will have to join with the Liberal Democrats to form a coalition conservative government with liberal democrats. At this time, though, that has not yet happened.
Politics make strange bedfellows and for power anyone will bed down with anyone. What the markets want to see, however , is someone in charge.
2. Result Of Fear In The Marketplace
The fear in the market from the European turmoil was evidenced by the precipitous fall of the Dow Jones on Thursday, May 6.
The market was already down due to fear and uncertainty over the Greek sovereign debt crisis before falling another 500 points in a few seconds.
At one point, the Dow Jones fell by 900+ points, the largest ever point drop. That was intra day and it recovered sufficiently to close down by only 300+ points, relatively speaking.
So far, it seems like no one knows for sure the full cause of the drastic point decline. Quesions circulating are :
Regulators are looking into all of the above.
3. What Trades Made Sense During The Prevailing Fear In The Market
Gold and the US Dollar rallied. Both can be played on the equity market through ETFs.
Gold has essentially become a reserved currency. It topped $1200 an ounce this past week.
Pure plays(hold the actual commodity) Gold Commodity ETFs like symbols GLD and DGL saw good gains. IAU is another Gold ETF that saw good upward movement.
4. Signs Of A US Economic Recovery Drown Out
What got drowned out in all the fear that was prevalent in the market was continued evidence of a strengthening US economy.
The April Unemployment Report released on Friday shows that the US economy is picking up steam.
Aprilís employment report was the best in 4 years. Also, it was the 4th month of job growth.
5. Next Week - Clearer Skies Expected
The reasons for this expectation are:
Even though the short term technical uptrend has been broken, this is a fast moving market that is acting with lightning speed .
In just this week, it is already down 10% and that is regarded as a correction. One should start looking for entry points.
Be mindful, though, that the market can pull back a little further. Donít ever try to catch the very bottom. That can be a hazardous preoccupation.
Patience is a great virtue - wait for a reversal Ė it will happen fast enough.
What is giving rise to this optimism is the fact that the fundamentals for the US market are good and getting better which bodes well for stocks doing better.
Academic research reveals that 70% of the average stock's performance is based on macro market conditions, 20% is due to industry circumstances, and only 10% comes from what happened to that specific company.
Some technicians believe all that is baked into the price of the stock and studying the charts will encompass and incorporate the fundamentals.
In any case, there should be good opportunities to purchase solid equity companies. Adopt good rules for entering and exiting your positions.
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