Monday November 17, 2008
Navivest

Friday was quite an interesting session. Almost right out of the gate, stocks trended downward and by 1PM, a quick analysis would have had traders thinking that a down day for the stock market was a foregone conclusion.

At that point, the Dow, which had opened at 8822.19 from Thursday’s 8835.25 close, was down to 8469.99.

Around 1:15 the Dow and stocks in general, started rebounding from just about the lows of the session and kept moving to the upside until about 3PM, hitting an intra-day high of 8923.18. Then things turned around again and we saw another down trend. At about 3:52 PM, just 8 minutes before the closing, things fell of a cliff and we ended the day down 337.94 on the Dow Jones Industrial Average. Nasdaq was down 5%.

Things could continue to be dicey today. On Friday, the EU officially confirmed that the fifteen nations making up the Euro zone have officially entered a recession. A recession is defined as two consecutive quarters of negative growth and the EU zone saw a 0.2% decline in both the second and third quarters.

Overnight, Monday in Japan, the Japanese Economy Minister Kaoru Yosano announced that his nation had entered into a recession.

So the news keeps getting worse and stocks will continue to reflect that.

With all the news that the global economy continues to worsen, commodity prices should continue to suffer and investors should look to short related stocks. This should be down with the understanding that we will continue to experience volatility that could send the major indices up 5-8% or even more in one day. So taking profits whenever they occur and shorting whenever we get a nice rally might be a wise course of action unless you are willing to short and hold and have the fortitude to withstand those intermittent blips.

Tags: Economy  Recession  Trading Plan
 

If the financial media is any indication, Wall Street professionals all seem to believe that “if we’re not in the ninth inning of the current malaise, we are pretty close” which in other words means that things are about to turn around for the better in their opinion. Their actions however seem to tell another story.

 According to an LA Times article from June 18th, a Merrill Lynch (MER) survey of 200 money managers who together have over $700 billion under management, “indicates that the risk of stagflation is beginning to create a major headwind for equities,” As a result, they’ve reduced their exposure to equities.

According to the article, “the net percentage of managers who say they are now “underweight” in stocks (meaning they’ve cut back much more than normal in asset-allocation portfolios) jumped to 27% from just 5% in May.” Furthermore, 81% of those managers believe that current earnings estimates are too high, which means they won’t be putting their clients’ money into equities until things in their opinion, change.

 For the average investor out there, this is significant. Remember that first lesson in economics that dealt with supply and demand? Well as more and more managers sell shares instead of buying, stocks will continue on a downward path as demand drys up.