Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Trend Decisively Broken, Trading on Emotion – Eurozone Blues

Stock-Markets / Stock Markets 2010 May 15, 2010 - 09:55 AM GMT

By: Peter_Navarro

Stock-Markets

Best Financial Markets Analysis ArticleLast week, I indicated that the market trend was broken and that the best strategy for a risk-averse retail investor in the absence of a clear upward trend was a move to cash. So emotionally, just how did you handle that observation when the stock market soared on the following Monday?


If your reaction to that sucker’s rally was: “boy, I wish I’d been in the market and that Navarro is an idiot” then you may not quite understand the underlying macro logic of a cash call in the absence of a definable trend. At times like these, market participants have no clear consensus view on the future direction of the economy. Some look at the robust leading economic indicators here in the U.S. and a (slightly) improving job market and are bullish. Others look at the Eurozone debacle and see a collapse of the global economic recovery and are bearish.

At such times, “playing the market” is like playing roulette. It’s a 50-50 gamble (less your trading costs) rather than an intelligent speculation. In such circumstances, you may well experience the “high” of winning for a day such as we had last Monday. BUT you are just as likely to get hammered – as the market was in the last two trading days of the week.

The broader point here is to get your emotions out of your trading. If the market has an up day in times such as this when there is no clear market trend, don’t regret sitting on the sidelines. When the market has several down days, don’t even gloat that you were out of the market. Just wait and watch for the trend to reestablish itself and then implement whatever stock-picking strategy you have found to be best.

The Euro is Dead


Now let’s switch gears and talk about where the trend is likely to go – up or down – and what the falling euro means:

1. The euro is likely to continue in a long term decline
2. The euro will continue to decline because “Le Tarpe” will either lead to a massive boost in the euro money supply OR a collapse of the euro if countries that want to borrow “Le Tarpe” funds refuse to agree to the conditions of accepting the money. There is NO third option so the euro must fall!
3. A falling euro will hurt the U.S. economy directly by reducing U.S. exports to Europe. But this is a small effect since European exports only account for about 2% of the U.S. GDP
4. A falling euro will indirectly hurt the U.S. economy by reducing the probability that China will revalue its yuan relative to the dollar. This is the far greater impact because it will mean continued trade deficits with China here in the U.S.
5. China won’t revalue the yuan at this time because as the dollar is rising, so, too, is the yuan. This hurts Chinese exports to Europe – its largest market. Ergo, there is no way China would allow further strengthening of the yuan to the euro by strengthening the yuan relative to the dollar!!! (If you don’t understand this one, please re-read until you do. It is the single most important dynamic right now in the global recovery besides the euro collapse itself.)
6. The decline in the euro boosts gold and silver prices by raising the probability that gold and silver will be de facto “reserve currencies” in a world where high sovereign debt levels in both the U.S. and Europe make the dollar and euro less attractive as reserve currencies over time.
7. The usual positive correlation between gold vs. oil and commodity prices has been decisively broken by the euro crisis. A stronger dollar drives down oil and commodity prices BUT a weaker euro boosts gold as a reserve currency play.
8. It is easier to paint a bearish global scenario from the euro collapse than a bullish one. The bearish scenario is this: Europe stagnates as “Le Tarpe” fails because of political pressures that were not present in the U.S., i.e., while the U.S. could make demands on Citi and AIG et al, the Eurozone bigwigs can’t bend Greece and Portugal and Spain to their will. China implodes on a combination of collapsing real estate and stock market bubbles coupled with a fall in exports to the Europe. The U.S. continues to be leached by Chinese mercantilism while it loses its export growth in Europe while internally states like California and Illinois undertake contractionary measures that ripple across the nation.

Of course, despite this colossal bummer scenario I have presented, the global economy may still recover and the bullish market trend may soon resume. But to come full circle, why would you want to be fully invested on the long side at this particular point in time? Unless, of course, you prefer emotional gambling to intelligent speculation.

I leave you with this observation from Market Edge about the technical condition of the market:

The technical condition of the market stayed in a weakened state last week as the CTI and the Momentum Index remained in bearish territory while the Strength Indexes collapsed. Following the nasty sell-off which occurred the week ending 05/07/10, it came as no surprise to see the market bounce last week. What was somewhat of a shocker was the size of the rebound which saw the DJIA gain 3.9% and the NASDAQ 4.8% on Monday alone.

Despite the fact that both the DJIA and the NASDAQ finished the week with a gain, the technical picture continues to point to rough sledding over the next several weeks. … With the negatives far outweighing the positives, the probabilities are high that the correction has a way to go. Typically, sharp declines are followed by a series of failed rally attempts over a 3-4 week period with a valid test of the previous lows needed before a genuine rally can develop. Monday's bounce was a good example of such a bounce.

Navarro on TheStreet.com
Click here to review my videos on TheStreet.com.
———-

Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

© 2010 Copyright Peter Navarro - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in