Stock Trading Review For The Week Of May 10 - 14, 2010



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Content

  1. Multi Personality Disorder exhibited by the Market

  2. What Trades Made Sense

  3. Next Weeks Market Behavior

1. Multi Personality Disorder exhibited by the Market

The stock market behavior for the week has been very bipolar. The week could be divided into 2 distinct parts.

Early week
Early in the week, the market rebounded from a horrible decline the previous week.

This was in relief and optimism over the Trillion Dollar bailout package that was offered to Greece to prevent its economic collapse.

The stock market climbed back a long way from the May 6 flash crash to its biggest 1 day gain in over a year.

However, it couldn’t climb the wall of worry that clouds the horizon over the real or perceived Euro Crisis.

Late week
As the week progressed, the noise in the market concerning the Euro problems rose to an deafening crescendo.

The concerns included:

  1. The Trillion Dollar Greek package may not be enough. At best it is a temporary fix to Greece’s deeply endemic economic problems.

  2. Portugal and Spain have been showing signs of economic instability.

  3. Since Europe is a big export market for the US, slowing economic growth in Europe would affect or derail the US economic recovery.

  4. Some are even suggesting the disintegration of the Euro Zone.

By th end of the week, the worry over the viability of the Euro Zone was too great.

Many market participants chose not to approach the weekend with long positions.

As a result, the market sold off into the coming weekend.

However, some of the fears in the stock market are real and some are just noise.

Which Fears Are Real

  • The Euro problems highlighted the flaw of the work-ability of a semi economic union without an accompanying political union. Portugal and Spain are also stressed and have uncertain economic futures.

  • When times are good, the flaw or cracks get masked over. It is only when stressed do they show. The Euro Zone is stressed now and its fault lines get exposed, expanded and magnified.

  • Yes, any economic downturn in Europe will have a marginal effect on US exports. But Europe is not an island or single country.

  • One of the problems of the Euro Zone arrangement is that among the 16 countries, at any one time one country could be in an economic decline while another is enjoying growth.

    The individual domestic situation would require different fiscal and monetary policies to spur growth or stem inflation as is needed. Having a single currency will not serve each country equally well.

    For example, those countries that need a growth spurt will desire a weaker currency to help their exports. However, the Euro cannot be made to serve just one country.

The great benefit of having a Euro currency was its size - a giant currency to compete with the US Dollar as the worlds reserve currency.

Which Fears Are Noise

The claim that the Euro Zone will fail is noise!

So what’s the worse thing that could happen in the disintegration of the Euro Zone should that occur?

The worse thing is that countries revert back to their previous currencies - France back to the French Franc, Germany back to the German Mark and so on.

It will not be catastrophic. England never joined the Euro Zone. The British Pound has survived without a problem - it has only experienced the usual currency fluctuations.

2. What Trades Made Sense

The Euro continued to get hammered. Gold and the US Dollar continued their upward move.

Although they are traded in the commodities markets, they can be traded in the equity market through ETFs.

Gold
One of the values of gold is as a hedge against economic and or political turmoil. The Euro Zone problems continue to drive the Euro currency down and gold up.

Gold has essentially become a reserved currency. It pushed well above $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.

US Dollar
The US Dollar continued to shine. The US dollar ($US) rallied for the same reasons gold rallied.

This could have been played with US Dollar ETF symbol UUP.

3. Next Week - The Market Behavior Depends on What the Market Focuses on

The stock market is a discounting mechanism. It tries to preempt and discount events before they happen. By the time the events take place, the market has usually acted.

There are times when the market is shocked because of an event that it did not or could not predict - the move then is wild and dire.

Usually, though, by the time a predictable event happens, the market has already discounted it.

Currently, the market can’t decide what is predictable and what is not.

It can’t decide whether to focus on the improving US economic fundamentals or the continued concern over the European uncertainties.

In the market, fear usually triumphs over facts so gyrations and volatility will likely continue.

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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Note
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.

Visit the Previous Week, May 3 - 7, 2010, Trading Review >>>

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