Stock Trading Review Of The Past Week: May 3 - 7, 2010



Whew! What a wild ride in the stock market this past trading week, May 3-7, 2010!

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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.

Content

  1. Turmoil In Europe

  2. Result Of Fear In The Marketplace

  3. What Trades Made Sense

  4. Signs Of A US Economic Recovery Drown Out

  5. Next Week - Clearer Skies Expected

1. Turmoil In Europe

First

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.

Second

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 :

  • Was it human error (a trader who supposedly hit a billion sign instead of a million sign on a trade entry)?
  • Was it due to a lack of coordination among exchanges?
  • Was it a system failure?
  • Was it a regulatory failure?

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
One of the values of gold is as a hedge against economic and or political turmoil. The Euro Zone problems have been driving the Euro currency down and gold up.

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.

US Dollar
The US dollar ($US) rallied for the same reasons gold rallied. This could have been played with US Dollar ETF symbol UUP.

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.

April’s employment report was the best in 4 years. Also, it was the 4th month of job growth.

  • 290,000 new jobs created
  • 220,000 of which were in the private sector - very important - thus not just government created jobs like the census workers
  • Productivity up

5. Next Week - Clearer Skies Expected

The reasons for this expectation are:

  • Resolution of the Greek condition or a least a relief package to keep them from defaulting is expected

  • Britain should resolve it’s leadership problem

  • Re-focused attention on the improving US economy

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 reversals to find entry points.

Be mindful, though, that the market can pull back a little further. Don’t ever try to catch the very bottom. That can be a hazardous preoccupation.

Patience is a great virtue - wait for a reversal – 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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