The world of turmoil facing the markets remains the greatest challenge for investors. Headlines continue to fill will problems and issues facing both stocks and the economic picture. This goes back to the old story of confidence and clarity. This is something we discuss on a regular basis when the market is in transition. The confidence factor is dropping in the future outlook for growth and that leads to selling or at best sector rotation of assets. There is evidence to the that fact in scanning the more than 100 components of the world markets. Commodities are a moving lower and that money has been rotating into bonds. Stocks have been transition from growth to value and value to bonds. The lack of confidence in stocks is not a surprise when you break it all down.
The dollar is the bigger of the stories short term. When you look at a chart of UUP, PowerShares US Dollar Bullish ETF or DXY, US Dollar index you can plainly see since the current top for the S&P 500 index fund on April 2nd, the dollar pivoted at the same point moving higher. It tested in May just like the index bounced and off the low, but equally reversed. A stronger dollar has been the cry for some time to help the US. However, the hope was for a strong global economy to accompany the rise in the dollar to keep commodities prices in check. What we have is turmoil in Europe pushing the dollar higher and the it is more of a flight to safety than a strong dollar. Either way it is killing commodity price. That is not all bad for the consumer as it gives some price relief. Gold has dropped $233 per ounce since early March and is in a position to test $1544 currently. The strong dollar may continue with what is happening in Europe near term. Thus, don’t chase gold and other commodities thinking now is the time to buy. The dollar will have to turn first and then looking at gold and other commodities will make since.
Asia is struggling to hold any near term support levels as well. The concerns over the European impact on China due to the declining economic picture in Europe is in play. The GDP for China has continued to decline and that is impacting the stock picture. We discussed the short plays for China earlier this week and they continue to play out nicely. The key here is to protect your gains and not get greedy! The longer term picture is likely to remain on the downside, but nothing goes straight down and the conditions technically are oversold. Thus, we could see some intermediate rallies. The short term trade in China was just that, honor the time frame, protect or lock in gains as we move forward and look for the next opportunity on any bounce to be short again.
Europe is not healthy in any way. The analyst and media want us to believe it is getting better, but at each turn that is not the case. This is the same type play as Asia. The downside is the trend and that will continue for the foreseeable future. Thus, being short is the trade and letting it run for the short term and booking profits is the play. The charts show both Asia and Europe moving in unison with the US markets directionally. They do not participate on the same level however. The downside selling is greater and the upside rallies are less. Thus, play the downside move in Europe and take what each step offers. The current move down in IEV, iShares Europe 350 Index ETF is nearly 10% since May 1st. The downside move in the S&P 500 index almost 6%. Thus, the downside risk is greater in Europe and the trades are better as a result. Watch and manage your downside plays in Europe.
The US is moving lower as a result of the issues above. They are impacting the outlook for growth in the US. The issue being that we decided we should be an exporting country once again. The down fall being an exporting country is when the countries you export to have economic problems, exports fall. That is what you are seeing now. China and Europe have problems and they are leading to problems in the US. The saving grace is we have domestic consumption in the US. A stronger dollar and lower commodity prices will lead to consumer what we make and manufacture and help keep the economy afloat at 1-3% growth rates. When the global economies improve we will see GDP improve and stronger growth return. At least that is the hope we are all holding for now. The US markets are pulling back and they have broken key support levels and are prepared to head lower on the heels of the issues mentioned above. Protect the downside risk if you are long and raise your stops if you are short. Investors still want to believe the bounce is coming and that could happen when you least expect it.
Short is the current play, but you have to manage the risk of those trades and keep looking forward taking this one day at a time. Stay focused and most of all stay disciplined.