The Greek Tragedy Spreads

If you’ve been following these pages for the past few weeks you should be well versed in two things that are going on in the world right now. First, the events in Europe and the resultant effects on the US markets and other markets. We have been particularly bearish of late, and just the other day we saw a one day plunge of more than 900 points, close to 9% at one point before a recovery to “only down” 350 points. Volatility broke out and has doubled in a week.

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The Greek problem is now spreading to the other PIIGS (Portugal, Ireland, Italy, Greece, Spain) as Sovereign debt downgrades are now de rigueur. Portugal, and then Spain, just Italy and Ireland left to go. But, this is not the big news. The big news is the Euro, which has crashed from the mid $1.30s to the mid $1.20s in a few days time – a huge move in the world of currencies. My prediction is that we have a very good chance of seeing the Euro heading into the $1.10-$1.15 level and then parity. While this seems like horrible news on the surface, and it is, it will be a boon for European exporters over time. Just like the low dollar helped the US economy, the low Euro will help Europe. So, while we will be screaming bloody murder about the mismanaged economies of Europe in the months ahead, secretly you should be thinking about accumulating shares of European exporters once the Euro declines to the $1.10-$1.15 levels, and really loading up at parity if we get there.

Market Meltdown – Blame the Computers?

The word on the street is that the meltdown on Thursday was caused by program selling a la 1987. Program trading refers to automatic computerized buy and sell programs that kick in when the market indices reach certain levels. Here’s the problem: there are a lot of players in this market and they’re all looking at the same technical indicators. When those numbers are hit, they all do the same thing: buy, buy, buy or sell, sell, sell! If you needed any more evidence that the computers are in control, Thursday’s action should put your skepticism at rest. It should also make you feel really queasy about the future of trading in the market. My take is a little different. Maybe it was computerized trading. But, that didn’t kick in until the markets were already down 3% after being down 2% in the day’s prior. Sometimes it not the magnitude that you should be concerned with, rather the direction of the market, that direction is negative and remains so.

Volatility, as measured by the VIX index soared this week. I have written in the past that the VIX puts out very accurate buy and sell signals and when we were down in the teens a few weeks back, it was a signal that complacency was begin to set in and investors were getting greedy. The VIX hit a low of 15.23 about three weeks ago. Yesterday it jumped to almost 40 intra-day – that’s pretty scary territory and a definite short-term buy signal. Of course, the market reversed and gained back almost 600 points from that level with the VIX closing at 32 and change. This is still a relatively high number and if it heads up to that 40 level or higher, it will signal fear and panic in the market and a time to consider buying shares.

My friends, I have to share a secret with you. Investing as you learned it is a dead science. It has been for a couple of decades now. This is a game, rigged at every level and your job and ours is to figure out how to play the “game” of investing. Outside of your job or business, it is still the only game in town if you want to increase your wealth and that means no matter how cynical we are, we must pay attention to the markets.

What the Immediate Future Holds

Over the next few weeks this market is going to be a crazy place to be. Finally the volatility that should be in the market is here. That means that volatile shares such as those in the tech sector and the financial sector will begin to make headlines daily.

Europe, BP, terrorism, and continued housing/employment woes are not the greatest backdrop for stability in the marketplace. However, that said, it is also a traders dream. Swings of 1% or more daily will be the norm – that is what the VIX is telling us. And, as long as that number remains above 25, expect swings, not like what we saw on Thursday, but enough to make you feel very nervous. What happened on Thursday was much like taking a super-laxative, but forgetting you took it. The market took a dump, a very big dump. Sometimes that’s a good thing to clean out the system.

What you need to do is to pare back some of your riskier positions. You know the ones…they’re the ones you should have sold but decided to hang on to because you felt a little greedy. This market has rewarded greed for 12 months, now it’s getting ready to reward fear. Set stop-losses now by looking over your portfolio and marking down numbers at which you will start getting insomnia. Start building cash levels so that you have dry powder. Days like Thursday will come about again, but for real and not because of a computer glitch. And, when those days come about, there will be opportunities to trade. And, trading is about all there is left to do in the markets today. Long term investing may not be dead, but it’s on life-support. It’s not a pleasant thought, but it is the new reality.

Best regards,

Kevin Raymond

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One Response

  1. Etty

    It’s about time someone wrote about this.

 
 
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