We have a likely debt default in Greece, pegged at a whopping 98%. Ireland and Portugal continue to struggle with muted growth and massive debt. Spain may be needing help. Bond yields are rapidly increasing in Europe in line with the risk levels. You can get a whopping 70% yield in Greek bonds, but then the bonds are likely to default. In comparison, the current yield on a U.S. 10-year bond is less than two percent. Germany and France are suffering due to their focus on the poorer nations. Germany is said to have no issues letting Greece default and then dealing with the debt crisis mess after.
This is not a market for the risk-averse. The stock index charts are showing a bearish death cross and this could signal additional downside moves ahead of us.
But the world is not ending. That I can say.
My best investment advice at this time is to remain calm, but at the same time monitor your positions carefully. You need to have put options in place to hedge the downside risk.
There have been numerous economic downgrades globally. The latest to downgrade the U.S. economy was the National Association for Business Economics, which made a downward revision to the U.S. gross domestic product (GDP) to 1.7% for this year, down from 2.8% in May. For 2012, GDP is estimated to expand 2.3%, well down from the 3.2% in May.
While there is a risk of another recession, the likelihood remains relatively low at this point, but could pick up if the U.S. economy continues to falter.
At this juncture, the near-term upside potential appears to be limited, unless there are new reasons to entice traders to buy.
The key risks are:
- U.S. economic renewal
- U.S. debt and deficit
- European debt and growth
- Global economic growth
The fear now is the occurrence of another recession in the U.S. and around the world. The fear is that the downgrades could be enough to trigger another sell-off and financial collapse.
Investor sentiment is extremely bearish. Charts are bearish and are flashing a SELL signal.
The near-term technical picture is bearish, as the key stock indices trade below their respective 50-day moving average (MA) and 200-day MAs.
In addition, Dow Theory continues to indicate a reversal to sell based on the recent action of both the Dow Jones Industrial Average and Dow Jones Transportation Average.
The stock market is dangerous at this time in the absence of a base or support. The condition is extremely oversold, so watch for any support. Failure to hold could drive the stock indices to new multi-year lows, so be careful.
The best strategy for risk-averse traders is to protect via put options.
Gold continues to be tops given the risk. The golden cross on the chart remains with the 50-day MA of $1,692 well above the 200-day MA of $1,505. I feel that gold prices will continue to edge higher, especially if the U.S. economy falters and another recession surfaces.
My advice to you is to buy a mixture of exploration-stage gold miners and small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.
Be careful; remember that maintaining your capital will allow you to trade longer-term.