What a difference a few days can make. Last Thursday, all was right in the world as Europe's leaders offered a comprehensive -- if not fully fleshed out -- plan to save Greece, strengthen their banks, ring-fence Italy and Spain, and attract new cash from Russia and China.
But now the deal is unraveling at what was always its point of vulnerability: A lack of political support from Greek citizens unwilling or unable to bear the burden of their national debt. And that, according to European Union officials, could push Greece into bankruptcy.
Once-ebullient investors are now scrambling for the exits, knocking out critical technical support in the process. By all indications, with internal measures of strength such as market breadth waning, the powerful month-long stock market rally has come to an end.
Here's why, and how investors should react:
All of this comes after Greek Prime Minister George Papandreou surprised the world by announcing a plan to hold a parliamentary vote of confidence in his government this week, as well as a popular referendum on Greece's bailout within the next few months.
With the opposition party (which is largely to blame for Greece's current crisis) promising the world to indignant Greeks, neither Papandreou's party nor the bailout agreement is likely to win majority support.
Things are very messy.
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Papandreou didn't discuss his plans with his European peers. German and French leaders were caught unaware. Distance has developed between Papandreou and his finance minister, who was recently hospitalized with mysterious stomach pains and who has played a key role in pushing for budget austerity and securing European Union support for the troubled country.
At least two members of the prime minister's party have now declared themselves independent, reducing the government's majority to just 151 members out of 300.
There are press reports that at least six ruling-party members have called on the prime minister to resign and favor seeking snap elections and the formation of a new government. It's as simple as this: Just when the eurozone crisis looked ready to end, the Greek government started to fall.
Now there are renewed concerns about the health of Italy and Spain, with their bond yields surging over comparable German bonds despite efforts by the European Central Bank to keep borrowing costs down. You can see this in the chart of the difference between the Italian 10-year bond versus the German 10-year bond shown above, which is pushing to a record high.
So what should investors do? This morning I recommended my newsletter subscribers book profits and move to cash. I also sold all the positions in the Edge Letter sample portfolio, including Mechel OAO (MTL), which gained 32% since I added it less than a month ago.
For conservative investors, hiding in cash is the best strategy right now. By definition, political turmoil is unpredictable. For more active traders, U.S. Treasury bonds are on the move again after a multi-week pullback. As a result, I'm adding the Direxion 3x Treasury Bull (TMF) to my sample portfolio.
For risk-takers, there is plenty of opportunity on the short side, particularly in energy stocks, crude oil and the euro. As a result, I'm adding the Direxion 3x Energy Bear (ERY) to my portfolio as well.
As the downtrend matures and develops, there will be opportunities for short plays against individual shorts. Stay tuned for a few ideas later this week. The situation has changed. And in this volatile, range-bound market, investors must be nimble and react quickly. Tuesday's action is just the latest example of that.
All of my recommendations were found with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
Disclosure: Anthony has recommend TMF and ERY to his newsletter subscribers.
Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.
The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Its going to get worse before it gets better. look around every business is loosing money and
wall street is showing gains. don't be fooled by this. this is mirage happening in desert. makes you feel like people are still making money in stock market. this two years will wipe
out many peoples savings. greed has set in. be your own investigator and keep eyes and ears open. how can stock market go up when the whole nation and countries around are at the edge of bankruptcy. manufacturing loosing, housing construction going down, unemployment going up. government cutting jobs to curb deficit. only a fool will invest in market and loose it all. desperate people who lost will be caught up in this.
not a single company is showing big profits except oil guys. the money is going to loose value in banks. that's what it is set up to do. by keeping interest low and not getting any value at 0% , and no where to invest, they want people to move money into stock market to get more interest. mr geitner and his buddies come from wall street. they are carefully waiting for people to gamble their savings into stock market. and the markets are going up and down. its like a bait. fisherman's know what a bait is. same philosophy is at work. don't be fooled by stock market. they are trying to exhaust people who have money in bank to move it out. they will break all the savers, by keeping interest low.
common sense is don't be fooled. world wide currency crisis are going on,
don't be forced to move savings into stock market to earn more money. keep it in credit unions which are non for profit. move money from bigger banks, since they will start charging more in fees to keep the money there. next prediction is fslic and fdic will start charging fees to insure your money in bank.
they know by keeping interest rate low and more regulation in place the economy wont move. they have lockdown in banks. more businesses will fail. that's what is happening. how can stock market go up to levels when everything is failing around. be wise and keep money safe.
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