Posts Tagged ‘debt default’
We have had an unusually high number of high volume down days lately, which were topped off with a massive down yesterday, July 27th. The Nasdaq with its 2.6% had its largest loss in five months. Market action in the major indexes constituted yet another 90% panic selling down day.
I have said several times earlier that third year bull markets typically are trendless, and this year is continuing to prove to be typical in that respect. The S&P 500 has mainly traded between 1,250 and 1,350 all year. IBD illustrates the lack of trend in the market well in today’s newspaper: “Last year, the Nasdaq had an eight-week win streak in the first half and then rose in 10 of 11 weeks in the second half. Those kinds of streaks make for good trading. So far this year, the longest up streak on the Nasdaq has been three weeks.” This market action calls for increased patience and continued adherence to your trading rules. Remember that a new trend will eventually emerge.
The reason for increased volatility lately is due to the lack of agreement between US politicians on how to handle the debt situation. But such discussions are not a new phenomenon; they have been going on for about three quarters of a century. As Ritholtz.com reports: “The regular debt ceiling limit dance seems to evoke a fairly standard set of behaviors in the two major US political parties: Whichever party is out of power (White House, or Congress or both) threatens not to support raising the debt ceiling. Which ever party is in power talks about how irresponsible and dangerous such a move would be.”
I don’t think the market has much to fear as I assume that they will reach a solution shortly. Yet another short-term solution that is. But yesterday, uncertainty became a little too high for the market participants to handle and a enough collected their chips to turn the market around. There is a clear risk that the US will be downgraded, and as I have stated many times before I believe this will eventually happen, and I also believe that the US will go bankrupt, or come into a situation that would seem like a close relative to it. But if that decline to bankruptcy starts with this downtrend or not I cannot tell. History shows that no systematic changes are made until our whole financial system collapses, first at that point is there enough political will to make any substantial changes. And substantial changes are what is needed. The way we run our economy, on borrowed and printed money, is not sustainable in the long term. This is an economic experiment that we to a more or less extend have been running, and gotten addicted to, since the Great Depression. The longer it has run the more we have gotten addicted to it. If you feel like reading more on this topic read this excellent column from Bloomberg News.
I have no clear perspective on the exact time for this collapse, and since I do not do any short term forecasting (only medium term and long term) I continue following my model which will in due course indicate when it is safer to enter a long-position in the market again. Remember that this is the same model that kept you out of the stock market during the crash of 2008 and indicated that it was “safe” to enter the market again on March 16th, 2009 just a few days after the market bottomed out. The model would have helped you avoid one of the last 100 year’s largest declines and also let you know when to return to the market again to participate in one of the last 100 year’s most rapid upturns!
There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis. Just look to Greece and the financial industry as an example.
Moody’s is getting closer to seeing Greek’s debt the same way as I am. Greece was downgraded them from B1 to Caa1. This is the same rating as Cuba has. As expected the rescue in 2010 failed to prevent Greece’s default risk to be reduced satisfactory, and now another discussion for a second round of funds are being discussed. 50 percent of of those who receive a Caa1 rating have according to Moody’s defaulted on their debt.
The reason why the EU is so afraid of a Greek debt default now is because so many European banks are stuffed with this junk debt on their balance sheets, and most of these banks don’t have the financial strength to take any such writedowns at the current time. And the European Central Bank is so afraid if its implications that it has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut — even in the form of Greece stretching out its payments. This is serious stuff. It is about time we realize that we don’t solve an alcoholics problems by serving him more Ouzo.
I indicated in my last post on May 24th that the market action that triggered my models into a downtrend was also action that we sometimes see near bottoms in the market. This turned out to be one of those times. The market has proved to be strong since then, breaking through its 50 day moving average and yesterday spiking up in significantly higher volume. This turned enough of my indicators to buy signals to indicate that we are now in a new UPTREND.
But as there were some cautionary signs to the downside last week, so there are in this uptrend. We typically like to see higher percentage gains in the indexes than we did yesterday. Another cautionary factor is that we are now in a third year bull market, and market action typically tend to be choppy with modest gains in such years.
Monitor leading stock for further indication to the strength of this new uptrend.
The strong market action yesterday was set off by indications that a new plan to save Greece was near. The market has chosen to party, at least now in the short-term. And I hope investors enjoy it while it lasts because I am certain (to the degree that anyone can be certain about anything regarding the financial markets and government action for that matter) that helping out Greece will do nothing else than cover over the cracks of the underlying structural problems which in due course will implode and cause even greater harm further down the road. I am confident that neither Greece, Portugal nor Spain will not be able to recover its debt ridden economies without going through debt defaults on a grand scale first, which will have severe global implications.
But for now, lets enjoy this last uptrend which is likely to take the markets above recent highs.