Can U.S. stocks hold the line when the rest of the world’s stock markets are in retreat?
After an initial self-off the Standard & Poor’s 500 Stock Index bounced—slightly—off support at 1040. You’ll remember from last week’s post https://jubakpicks.com/2010/05/20/have-things-stopped-getting-worse-faster-sorry-thats-as-positive-as-i-can-get-today/ that 1040-1045 marks the February low.
If U.S. stocks can hold above that level, then what we’ve got right now is a painful but normal correction to the big rally that began in March 2009. If stocks sink below that level, then investors are looking at something else—and no telling how serious that something else might be.
Considering what went on in Asian and European stock markets leading into the opening of U.S. markets it’s surprising—and I’ll admit heartening—that U.S. stocks held at 1040 this morning. As of this 11:30 ET post the S&P 500 was at 1052.
Asian markets closed down big on worries about the euro debt crisis, slowing global economic growth, and rising tensions on the Korean Peninsula. Rumors this morning had North Korean leader Kim Jong Il telling his military to prepare for war. (The news sources I’ve looked at this morning say that as far as they can tell North Korea hasn’t mobilized its army.)
Japan’s Nikkei closed down 3.1%. Hong Kong’s Hang Seng was off 3.5%. The Shanghai Composite fell 1.9%. And India’s Sensex declined by 2.7%. Basic materials stocks led the retreat. This sector would be expected to suffer the most if growth is slowing.
European stock markets followed suit. At the 9:30 a.m. ET open for trading in New York London’s FTSE was down by 2.8% with all 102 stocks in the index lower. France’s CAC fell by 3.5%. Germany’s DAX dropped 2.9%. And Spain’s IBEX retreated by 4.5%.
In Europe basic materials stocks, energy stock (BP in London and Total in Paris) and financials led the market downward.
marr.bo on 25 May 2010 – this is a cute “rule” (when playing blackjack…if after every hand you lose, you double your bet, you will always come out ahead assuming you always have spare cash) – but you’re missing three other assumptions:
(1) Assume that the house always has spare cash (can the house cover a multi-billion dollar bet?).
(2) Assume that the cards themselves cannot be bought or sold (once bets reach the multi-trillions, you start finding stacked decks).
(3) Assume that the rules cannot be changed in the middle of the game. Once bets reach the quadrillions (where total derivative markets extend), and itty-bitty changes start having massively unpredictable effects.
That’s a lot of assumptions if you asked me. That said, in general, buying low (like now) is better than buying high…
I am wondering just who is doing all the selling driving everything down.
It’s like there’s gravity and if there isn’t a ton of good news, everything sinks.
I do understand the concept of everyone getting out en masse to avoid losses (and thus the crowd causes a big drop), but how can it go on day after day when the fundamentals, IMHO, haven’t changed a lot from day to day.
I wonder what percentage of the drop is from redemptions and forced selling vs. individual stock investors, etc.
Hmmmmm.
So what will stop (temporarily) this madness:
a) central bank(s) intervention for euro
b) some “good” news out of China
And that’s it.
What can spoil it further:
a) Any politician opening his/her mouth – specially a crazy lady from other side of the pond
b) any more news from the PIIGS with banks going bust (we have few every week and no one cares no more!)
c) Big Ben moving the lips that sounds like “tightening”
The commodities will keep sliding anyhow -they always overshoot badly on both sides and remember commodity traders work with trigger fingers for they usually have another gun (leverage) to their head . When they sell, they really sell. And we get stuck with POT, MT, VALE, AA, etc….
Re: 1040…there’s always tomorrow! As of 3:30, a bit off the 1040 line at 1071. Crazy, crazy market!
To paraphrase “The market can stay irrational longer than you can stay solvent.”
marr.bo on 25 May 2010
There is an old rule when playing blackjack (which is what this feels like), if after every hand you lose, you double your bet, you will always come out ahead assuming you always have spare cash.
kelvin,
The analogy wasn’t meant to be a direct one, it was meant to point out the importance of keeping some powder dry and investing when the market drops. Its just mathematics. Dollar cost averaging is an example of this concept.
kelvinator, thanks for the info on covered call strategy. I haven’t tried it, will look into it. That outperformance over S&P with less volatility is impressive.
creativekev – yes, i would still be hanging in with a simple long position also. my covered calls just give me something to feel good about when a stock goes down – and pretend i’m being smart instead of just nervous 😉 But they can generate very good returns in a sideways market – especially a volatile one, and i’m impressed with the fact that a buy-write strategy has well outperformed the S&P with much less risk/volatility over the entire period since 1986 when SPX options began to be trackable — which includes a big chunk of the 1980 – 2000 bull market. see http://www.cboe.com/micro/bxm/
Jim, I read again your post “killed in a correction” from October 14th, 2009. Wall Street was at this same level, big difference, it was then going up, it is now going down.
I scratch my head trying to guess what could stop the decline in the next 6 months, and nothing occurs to me: have you got a ray of hope to share?
At first I thought SKOR (S. Korea small cap ETF) could be a play here (baed on over-worry about North Korea), and it still might be eventually. But until the world’s markets decide they have hit bottom, I wouldn’t touch SKOR.
kelvinator, sounds like you’re systematically implementing a strategy re POT – Awesome. My strategy is just to keep thinking about the long-term timeframe that I bought it for. I do think POT will reach a new high 2 yrs from now. Good luck to both of us!
Folks:
China is very worried about European crisis at this moment and has no mood for war in Korea. It’s not in China’s best interest to let war even started much less get out of control.
S. Korea will get hurt for this kind of tension regardless war starts or not, but troubles in S Korea may mean less competitors for US companies!
Folks, don’t get too caught up in the Korean disputes.
marr.bo, there’s an old rule in trading stocks that says to never double down on losing stocks(!) No joke. I’ve seen it written as one of the primary rules of thumb by professional traders for many years. It’s the kind of thing that can work a good percentage of the time – and then one day they carry you off the trading floor completely busted. It’s like the old story of grains of rice doubling on each square of the chessboard – the numbers can get big fast…
I see South Korea taking a very careful approach. It’s that little troll up north who keeps spouting off about war. The brat knows he’s an ant screaming at a lion, and China ain’t gonna back him any more. He’s grandstanding, that’s all.
The South doesn’t want war.
But don’t write off a certain presidential campaign that is desperate for jobs last resorting to broken window economics. I just don’t trust him.
I have a hard time believing a drop this fast and deep since April is going to stop on a dime with a close above the Feb low close and reverse upward. Still, I’m looking for a bounce. And creativekev, I’ve still got all my POT – but I’ve been writing and rolling covered calls with my last one a Sept 100 Call – my break even is down around 86.50 right now.
There is an old rule when playing blackjack (which is what this feels like), if after every hand you lose, you double your bet, you will always come out ahead assuming you always have spare cash.
I like to prescribe to a similar strategy…if you always have dry powder to invest, and invest instead of sell when the market drops, you’ll always come out ahead.
Sit tight, keep some powder dry, listen to Jim, trust the process.
What positive indicators will lead the bounce .. any ideas? 😐
yx,
One thing that concerns me about Korea: What if the South does something to antagonize the North?
That said, I do agree with your points on Israel and Iran. That is definitely the more scary possibility of the two potential wars.
Why did we not see this comming? During the US Debt crisis the American stock market fell, should have know the same would happen with the EURO debt crisis… 😐
Folks:
Sit tight. Think this. The market nearly double in about 13 months. This kind of correction (even if it turns to 20% or more) should be anticipated and shouldn’t be surprised.
sigli,
I’d normally be glad to sell you some POT. But I can’t get myself to sell when it’s falling off a cliff (anyone else with a similar reluctance to selling into a steep drop?). But I know, that just means I’ll end up selling at even lower prices, even if it represents an up move for that day …
If you are buying anything long today, I salute your courage!
I sold POT few month ago and made decent gains.
I think the market was trying to find a floor both Friday and Monday. Today’s drop probably more has to do with the Koreans which I think will not get out of control. Because both North and South are controlled by others. As long as the string pulling US and China do not want a war, it will be OK.
I think the potential war bet. Israel and Iran is more likely and scary. What make it more uncertain is that THE ONE that is in charge of US now does not like Israel. (He made it pretty clear.) Without US support of Israel, Iran may gain some advances which is going to be really bad for peace in that part of the world.
If a Republican is in charge, we know what
will happen. US will defend Israel. Now we don’t know what is going to happen. BTW, I am not promoting Republican or Democrat. I am simply saying that we know Republican will defend Israel, Democrat may not. That’s the uncertainty.
The Bears Sick Puppies’ song “You’re Going Down” in my head. Please keep it up bears! And please sell your POT creativekev. I want some more… sometime.
Jim:
I rather you not to say it. I remember your words of “unchartered terrritory”!
Jim, I’m trying hard to be a long-term bull on POT. Should’ve gotten out when you made the sell call on YARIY.