The signs point to more troubles ahead.
The stock market is in bear market territory for small-caps with the collapse on Thursday. There were several technical breaks materializing on the broad-based heavy selling. The small-cap Russell 2000 is a mess, down 17.89% this year and 25.46% from its 52-week high. The S&P appears to be heading towards support at 1,100. The downside risk is extremely high given the death cross on the stock index charts. When stocks traded at this level before, we saw buying support surface. Watch to see if it happens this time around.
There was a negative reaction following the Fed’s widely anticipated “Operation Twist” strategy, which was as expected and really nothing to get that excited about. The Fed expressed serious concern towards the U.S. economy, and this is obviously not good. We have known that the U.S. economy was in deep trouble. How can you not when the unemployment rate is over nine percent and there is only about one job for every four applicants?
The Fed will try to influence the longer-term financing rate by shifting its bond holdings. Operation Twist will see the selling of short-term bonds, replacing them with around $400 billion of long-term debt to try to drive down financing rates and help the housing market.
I’m not convinced that this will work and feel that the economy will continue to face hurdles, including soft jobs creation. The Fed admits that the economy is in serious trouble and is clearly scrambling to jumpstart activity. Interest rates are expected to stay low until at least mid-2013. The reality is that mortgage rates have been low for some time and this latest move will likely not make a lot of difference.
The U.S. could possibly move into another recession. Investment guru George Soros believes that the U.S. is already in a double-dip recession. In addition, the global economies are also at risk, especially in the damaged European economies with their massive debt. Greece will default if it cannot convince lenders to advance it a second round of capital.
And in Asia, China’s manufacturing sector contracted for the second straight month. Slowing in the U.S. and Europe is driving down the demand for Chinese-made goods.
A sector that is in significant trouble is the banking industry. Moody’s just downgraded the Bank of America Corporation (NYSE/BAC), Wells Fargo & Company (NYSE/WFC), and Citigroup, Inc. (NYSE/C). Banks in Italy have also been cut. The International Monetary Fund also warned on European banks. This is not a good sign given that banks have traditionally provided leadership.
Bellwether FedEx Corporation (NYSE/FDX) cut its full-year estimate due to the global slowing. FDX is a play on the global economies, so this is not good.
And now as the end of the third quarter nears, the upside for stocks will likely be limited unless there are new catalysts surfacing to drive the buying.
Gold and silver continue to be the places to have money, especially the miners that have trailed the superlative upside move in gold towards $2,000. Buy the miners.
At this point, you should hold steady and avoid chasing any stocks. Buy put options to help hedge against more potential losses. You can buy the SPX or SPY for broad market protection or can focus on tech with QQQ and small-caps with the ProShares UltraShort Russell 2000 ETF (TWM).
Be careful and remember that maintaining your capital will allow you to trade longer-term.