For the second day in a row, a feeble intra-day rebound attempt by the bulls was foiled badly on bad headlines out of Greece. On Tuesday, it was news a bank run is developing as the Greek people race to withdraw their deposits to protect their wealth against the likely Greek exit from the eurozone. On Wednesday, it was rumors that the European Central Bank was withdrawing its support for the Greek banking system -- ostensibly, to put pressure on leaders in Athens to stick to their austerity agreements.
Unfortunately, that sets the stage for additional losses in the days to come as buyers have been unable to retake major technical support levels violated on Monday. Moreover, not only does the fundamental outlook look bleak, but the stock market's recent weakness puts some very scary medium- and long-term reversal patterns into play.
First, the short-term picture. You can see in the chart above how the small-cap stocks in the Russell 2000 have tried and failed all week to move back over the four-month support level that it fell through on Monday. The NYSE Composite has also fallen through a multi-month head-and-shoulders reversal pattern.
Both pattern presage additional losses in the days to come. Backing out, the same head-and-shoulders reversal is in play on the longer term charts as well -- a sign that selloff, if sustained, could result in significant price damage.
Could it happen?
By all indications, a second round of balloting in Greece next month will elevate the anti-bailout radical left Syriza party and its dynamic young leader into a dominant position in parliament. Germany and other core eurozone members will then have to decide whether to renegotiate with an increasingly recalcitrant Hellenic republic -- or pull the plug. My guess is, they pull the plug and circle the wagons around newly vulnerable Spain and Italy.
Remember that much of the eurozone is technically already in a new recession. And now, banking woes are surfacing in Spain. The two will start feeding on each other.
Internally, the stock market is warning of trouble as cyclical, economically-sensitive sector groups continue to be bombed out. Investors are selling materials, energy, emerging market, and semiconductor stocks hard in favor of defensive, non-cyclicals like utilities, consumer staples, and healthcare. Industrial commodities are also being crushed. Crude oil has already fallen back to early November levels.
The wildcard is what the central bankers do next month.
Both the European Central Bank and the Federal Reserve have announced that they will withhold decisions on new stimulus measures until their June policy meetings. If markets continue to melt lower as inflationary pressures settle, they will take action. That would be enough to send stocks and other risky assets surging higher in a powerful short-covering rebound rally. A rally that will be short lived as the structural impediments to growth -- debt deleveraging, mainly -- come back into play along with a resurgence in inflation.
Buckle up. It's going to be a bumpy ride.
***Trading Update
The Edge Letter Sample Portfolio's short and short ETF positions are shining in this environment. Highlights include a 22.3% gain in the Direxion 3x Semiconductor Bear (SOXS), a 21% gain in Citigroup (C) short, ad a 15% gain in Gerdau USA (GGB) short.
I'm changing all my open positions to "hold" for now and will be looking to book profits soon.
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. Contact Anthony at anthony@edgeletter.com and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
If you have a 401k, just keep investing money every paycheck. Remember dollar cost averaging. Over the long run, dips like this actually help you earn more.
The S&P at 1300 does not make a buying opportunity. The demographics going forward are going to give a downward bias to the markets for awhile to come. Retiring baby boomers will need to liquefy their assets. In the short term the Euro-zone isn't anywhere near cleaning up their mess and they are a bigger economy the the U.S.
Buying now will be like trying to catch falling knives.
Here comes the pusher.
Time to smell the coffee and get off this train wreak before it goes over the " fiscal cliff" . There is no hope for Greece and the longer the EU fights among itself, there will be less hope for Europe. The US should learn from their example. This is going to get ugly real fast.
yes....where is uncle ben ......to save the day.
His low interest rates did absolutely nothing to help the economy.....rather they hurt the economy by providing no income to savers. With no income from CD's and bonds.....retires and savers have no money to SPEND......and grow the economy.
Bernanke is a real stupid F###
No...I am hoping that it gets better. Wish that CD's paid a decent rate so that people could earn income on their savings....and spend the money or just pay their bills.
I don't wish for bad things to happen......but feel with the corruption, sloth, dishonesty and greed in the world.....bad things will happen and things will get worse.
Replace these bad traits with generosity, work, savings, compassion.....and things will get better.
If Obama or Romney win....we all LOSE.....and within 4 years the deficit will be close or over 20 trillion dollars. and get the FED out of the way.....printing money was never the answer and never will be the answer
yes....where is uncle ben ......to save the day.
His low interest rates did absolutely nothing to help the economy.....rather they hurt the economy by providing no income to savers. With no income from CD's and bonds.....retires and savers have no money to SPEND......and grow the economy.
Bernanke is a real stupid F###
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