Market in Correction
Research for Online Investors

6/1/12

Irish voters approved the European Fiscal Treaty yesterday with 60.3% voting in favor.  Ireland is stuck in a recession with unemployment at 14.3% and those that are working have seen their wages cut or stagnate.  The outcome of the election means there will be more cuts in government spending in the future.  About half of registered voters participated in the election.

Ireland has been working out from under heavy deficits since 2009.  The government rescued five of the nation’s six large banks on the heels of large losses when the credit bubble burst in 2008.  Ireland ran the eurozone’s largest deficit in 2010 at 32.4% of GDP.  The government whittled it down to 13.1% last year and is continuing to cut spending to bring it down to the 3.0% target by the end of 2013.

We promised you a chart today with some technical analysis.  Here is the S&P 500:

We have drawn in the upper and lower trendlines that have contained the market since April.  Notice also the 200-day moving average that is at 1284. We pierced it this morning and it now is acting as resistance.

A closing below this line puts the market in “official” correction mode.

The two horizontal lines are at 1257 and 1222.  1257 is where the market closed on 12/30/11  If we reach this it will mean the market is back where we started the year.  It is also very close to the 50% Fibonacci retracement of the market rise we have enjoyed since last fall.

The next step down (let’s hope not) is at 1222.  This would mean the market corrected, giving back half of the rise in the market we saw starting in October and ending April 2, 2012.

Active traders can use the upper and lower trendlines as limits to trade against.  For the rest of us…stay short with some protection.  Either sell covered calls against your positions or buy inverse ETFs such as the TZA, QID, or FAZ.  You can find a good ETF list under our Investor Resources at www.galtstock.com.  We have a printable table of the most popular ETFs with links to yahoo to aid your research.

After the terrible job numbers this morning, we don’t see an interruption to the downward correction until the situation in the eurozone is addressed.  There will be technical bounces as traders cover their short positions, but the best place to be is short until we see a headline out of the eurozone, IMF or the Federal Reserve.

Precious metals have regained their mojo today as it becomes more likely the world’s central banks are going to print money.  After all, that is their answer for everything!  Angela Merkel is coming under heavy pressure to moderate Germany’s stance that governments must reign in spending to regain the market’s confidence.

If Germany stands its ground and forces other countries to turn their back on profligate spending, there might be hope for the eurozone.  Otherwise they will continue digging the hole they are in deeper.  There is really only one way out of the ‘death spiral’ the world’s economies are in and that is through productivity, not borrowing more money.

This will be difficult for stock markets that want quarterly growth and increasing returns, but no more difficult than for populations that have to go back to work and produce products and services at a better value than their competitors.

Quote:
Opportunity is missed by most people because it is dressed in overalls and looks like work.---Thomas A Edison

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