I hope you weren’t taken by surprise with the market sell-off last Tuesday; I have been warning that an adjustment was long overdue. For what you can do going forward this July, read on for my stock market analysis right now.
Stock Market Analysis: What’s Behind the Sell-Off?
I read somewhere that the rich lost some $70.0 billion in paper losses after the selling. As a group, they could have just paid for Greece’s debt payments and been better off.
Yes; much of the heavy selling on Tuesday was due to the Greek tragedy currently on stage in Europe, as I discussed in my previous visit with you. (See “Why Greece Could Signal the Great Crash of 2015.”)
Greece has not made a single payment in June…and will not do so unless it can convince its lenders to cave in.
Of course, the deep selling action was also due to the move of the Shanghai Composite Index into bear market territory, having corrected over 20% from its peak. The high-flying China A-shares were clearly so vulnerable to selling that they have more than doubled over the past year. This was fueled largely by excessive margin finance (we know how that feels; think back to 2000).
Now, if you’re looking for a sustained rally in the China A-shares, don’t bet your house on it. China A-shares continue to be at euphoric levels with little firm support. I would be looking at playing the downside—especially should the index rally. There’s simply too much froth here.
Global Events Not to Be Ignored by U.S.
The situations in Greece and China will continue to be overhangs on the domestic stock market. Greece could finally get a deal, but its future doesn’t look bright at this time.
Now I’m hearing Puerto Rico cannot make its debt obligations and will need help. This is where the U.S. will need to step in due to its close relationship with the country, as well as being its major lender.
Then we have Portugal, Ireland, and Italy with massive debts—perhaps eyeing the Greece situation. These countries have high debt-to-GDP (gross domestic product) levels that are vulnerable to rising interest rates. Spain appears to be improving. But with unemployment still at around 25%, you have to wonder who is actually benefiting.
It’s becoming a financial mess out there that could worsen even more so. But with all those years of easy money and building up massive debt levels, do you expect anything otherwise?
Many decades ago, geopolitical events outside the U.S. had much less impact. Now the world and global economy are closely interconnected. What happens thousands of miles away across the Pacific and Atlantic is felt here. That’s symptomatic of the globalization of economies.
Stock Market Heading Down
Moreover, the stock market is moving lower. About 26% of stocks are above their respective 20-day moving average (MA) versus 46% a month ago and 63% last week. The same pattern is also occurring for the 50-day and 200-day MA. About 37% are below their 50-day MA while 50% are south of their 200-day MA.
Investors: Put Up Your Defenses
I would be very cautious at this stage and look to adopt a defensive approach to the stock market rather than be on the offensive, unless you are a day trader. Use put options, lighten your positions, and simply don’t chase an unsustainable bounce unless you plan to sell it.