Get Ready for Some Action in the Second Half

Stock Market Second HalfWe are at the mid-point of the year, and so far it seems like a rollercoaster ride driven by heightened stock market risk. We had a stellar January, followed by some softness in February and March. April and May, followed by losses, but we saw some oversold buying in June. The key stock indices are still down from the end of the first quarter, and with many unknowns and stock market risk, it may likely be a rocky second half.

Taking a look at the mind of investors tells us the situation. Since May 15, there have only been five bullish investor sentiment days on the NYSE and seven on the NASDAQ. Compare this to the start of the year when each session in January and February saw bullish sentiment along with the majority of March. The second-quarter sentiment has been muted.

Not only do you have the European debt crisis dragging on in the eurozone, but China is stalling, and the U.S. economy, while growing, is relatively stagnant. Combined, it means high stock market risk.

Corporate America may struggle in the second-quarter earnings season to begin on Monday, which I discussed in “Don’t Expect Much from Second-quarter Earnings.”

There is also nearly $16.0 trillion in U.S. national debt and deficit levels, which adds to the stock market risk. California is nearly broke and many other states are trying to squeeze the coffers, looking for money. And while this is going on, you have about 13 million Americans looking for work and probably about 25 million Americans who are unemployed or underemployed.

We also have stock market risk associated with the presidential election. President Obama is getting ready to defend his presidency and win his second term, but Republican presidential candidate Mitt Romney wants to ruin the party for the Democrats. With the election drawing closer, it will be tough for significant policies to be launched, which adds to the overall stock market risk given the political unknowns.

Stocks are now at a crux after rallying back to just above the respective 50-day moving averages (MAs), which continues to be a battle zone for stocks. We are seeing some buying support, but the lack of trading volume and momentum entails stock market risk.

On the plus side, the broader stock market is drifting higher. About 62.2% of all U.S. stocks are above their 200-day MA, up from 42.7% a month ago. About 69.5% of U.S. stocks are above their 50-day MA, up from 18.9% a month ago.

What we may likely see is sideways trading as we head into the quieter summer months, but the uncertainty in Europe could continue to keep traders on edge and heighten the stock market risk.

At this juncture, the near-term upside potential appears to be somewhat limited, unless there are new reasons to entice traders to buy. There appears to be buying on dips, and this is positive, but the negative will continue to be the light volume on the up days.

The stock market risk needs to be monitored.

To continue on something that I have emphasized before, the key is to monitor your positions and take some profits on the big winners. Take the opportunity to sell into strength.

Option traders could use call options to play potential gains, while taking some profits on current stock positions. In this way, you can manage the risk.

Use put options to hedge against a downside move.