Market Risk Rises on Worries About Global Economy

Small caps were the first to break below support last Friday. Semiconductors and basic materials followed on Monday. Tuesday brought more selling as the indexes gave up more ground with investors willing to head to the exits. As we have discussed for several weeks the upside trend was in play, but you have to protect against the trend reversal. In some sectors the trend is broken while others are still holding to the upside. The word we used in the weekend update was catalyst. I stated the key ingredient for the week would be economic data for the US markets. In reality it has been the economic data globally that has put a damper on markets rally.

Europe once again in picture with the Greece bailout becoming a reality and the cuts taking place relative to the bonds. All the cuts sound good when they are be discussed and agreed upon, but the reality is where the reactions begin. Those realities relative to the cuts are being felt and the European markets reacted in earnest to the moves.

China cut its growth¬†estimates to 7.5% for the 2012 period.¬†The¬†number¬†didn’t sit well¬†with investors as GXC and FXI both dropped more than¬†three percent on Tuesday. Brazil reported GDP at 2.7% and that sent investors to the exits as well. EWZ fell 3.5% on the day in response to the data. The Euro Zone¬†posted a negative 0.3% GDP number which added to the Greece issues pushing the index down 4% in response.¬†All the negative global data offset the “strong” US GDP report from last Friday at 3%, interesting the US number was strong at 3% versus weak in Brazil. Perception is everything. The reaction by the¬†dollar was a climb back¬†near 80 on the dollar index, and UUP was back near the February highs on Tuesday. The news was enough to send global markets lower and analyst back to the drawing boards on why the outlook is still positive.

As the noise begins and the uncertainty of emotions rise we have to look to the charts for direction and to keep our emotions in check. I heard from my computer throughout the day on Tuesday… “order filled!” We hit stops on more than half of our positions and raised cash back near the 55% level. Of course the first reaction is to be concerned about the markets bouncing back from the emotional roller-coaster day and being left out of the move. The truth of the matter is my first thought should be good, now I can focus on the next opportunity. This market may very well reverse and head higher. If I am doing the latter statement of looking for the next opportunity I will be prepared to put money back to work and take advantage of whatever happens going forward. If I am focused on the stops and why it was not a smart move, I will miss the next opportunity. Investing is a game of emotions no matter how much logic we think we are applying, emotions rule the day. As long as there is real money involved, your emotions will be involved. We can all talk tough and macho, but money breeds emotions. Discipline is the only way to keep them in check relative to management of your money.

The chart below of the S&P 500 index shows the move back below the 1370 mark and resting on the next level of support at 1343. We moved below the 20 day moving average which should have offered some help, but failed to do so on the move lower. This begs the question of how low will the pullback go? The trendline or 1315 looks logical for the near term. 1293 is not out of the question. The key is to let it play out versus attempting to be a prophet. The smell of emotions is in the air and that makes for interesting short term events. Discipline is the key. Manage your money and the risk exposure you can stomach.