Market Risk: Why Upside Moves Will Not Be Easy

By George Leong, B. Comm

October was one of the best months for the stock market in history in spite of the market risk. Everyone was buying and it didn’t matter if it was technology, industrial, or some new never-heard-before-technology. Everything went up, which is why we are now facing some selling pressure.
Up we go, down we go. Traders are currently jittery following the strong October. The month ended on a ghoulish note on Halloween. November looks like it will also begin sour, with a jump in market risk.
European stocks got hammered. The FTSE 100 moved down over three percent, while other key European bourses plummeted as much as five percent. The selling was driven by a major surprise when the Greek Prime Minister said the country’s new bailout plan resulting from the debt crisis would have to pass a national referendum—adding more market risk and unknowns to the European and global situations. The reality is that there are revolts on the streets of Athens, as people are fighting to safeguard their previous benefits and lifestyles. I mean, why would you not fight to protect a cushy job with early retirement?
But, as I have said on numerous times in the past, Greece is not the only country in trouble. The other members of PIGS also add to the market risk. Speculation is swirling that Italy may be vulnerable to default. The country is undergoing their own austerity strategy, but I expect some surprises to pop up and this will prop up the market risk.
There is also the renewed concern towards the slowing in Asia, as China’s factory activity declined to its lowest level since February 2009. The economic weakness in Europe is negatively impacting exports in China and other Asian countries and adds to market risk.
Going back to the U.S., the key stock indices have each breached their respective 200-day moving average (MA), while the S&P 500 has moved back into the red for the year.
The downside break is worrisome and could point to more weakness to surface on the charts, especially if the non-farm jobs reading this Friday are poor, as many expect them to be.
On the plus side, based on the seasonal trends, market risk may decline, as the months from November to April have resulted in the biggest gains for the DOW and S&P 500 in the past, according to the Stock Trader’s Almanac.
Technology has been better, with stocks advancing in eight months from November to June.
So, while there are the market risk and volatility, if you trade the historical patterns, ride the gains, but make sure you also take some money off the table.
I continue to recommend using put options or buying short-based exchange-traded funds (ETFs) as an offset to the weakness. It’s easy and cost-effective as a hedge.
Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you have a large position in. Index Puts include the SPY (S&P 500), QQQ (NASDAQ), or IWM (Russell 2000).
Take a look at what I had previously said about the global economy stalling in Stocks Facing Many Hurdles Ahead.
An area that has been under some pressure, but which I really like longer-term, is China’s travel sector; you can read about it in China’s Travel Market: Why It’s an Attractive Chance for Investment.

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The Only Way the Stock Market Breakout Will Hold

By Mitchell Clark, B.Com

I continue to be dumbfounded by the actions of Greek politicians. Just when more certainty was returning to currency and stock markets, they screw it up again. Make no mistake; today’s stock market woes are largely due to the European debt crisis. I’m totally unimpressed by how this is being handled.
The stock market did a great job breaking out of its correction trading range. The question is, can the breakout hold? If Greece would get its act together, then this is a stock market that wants to go higher.
Everyone knows that corporate earnings tend to be managed by companies and Wall Street analysts. But corporate earnings have been decidedly strong this quarter and all throughout the year. I’m certain the stock market would be a lot higher today if it wasn’t for Europe’s sovereign debt crisis.
We’ve seen very solid corporate earnings from the technology sector, basic materials, healthcare, and industrial goods. Stock market investors revised their corporate earnings expectations lower going into 2012 and this is setting up the stock market for a new advance, providing that the debt crisis or some other shock doesn’t take place. It’s a tricky time to be a stock market investor—with the age of austerity comes a great unknown. There will be growth in the future, but will it be like it was before? It’s tough to imagine Main Street corporate earnings taking off without a new up cycle in the real estate market.
The current stock market is well set up for a decent rally. Valuations are reasonable, visibility for corporate earnings is mostly solid and there is lots of cash sitting on the sidelines. The key going forward will be renewed certainty on the European debt crisis and renewed spending from consumers. With confidence comes hope and with new hope for the future comes renewed consumer spending.
One thing that’s seems quite unlikely, however, is a speedy return to normal economic growth rates. We’re still coming off a major period of debt-fueled excess and both Main Street and Wall Street (banks in particular) are trying to establish a new normal for operations (see All Global Investment Risks Point to a Steady Dollar & Mediocrity in Stocks & Metals). I have to say that, if it weren’t for emerging markets, interest rates being low, and a weaker U.S. dollar, corporate earnings would not be so robust. Policy-wise, the Federal Reserve is making progress domestically. It’s Europe that’s holding things back.
The stock market was due for a little rest after such a strong breakout, but the Greek news was a real surprise. The expectation for the fourth quarter is for another round of solid corporate earnings and, accordingly, the breakout should hold. Any return below 1,200 on the S&P 500 Index would not be good technically. The stock market is muddling through the tough times. It’s time now for Greece to get its act together.

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