Signs a Perfect Storm May Be Brewing

stock market riskAre we seeing signs of the perfect storm arising in the stock markets? Not only do we have growth issues in the United States, but Europe and Asia continue to pose issues. I’m not saying the good times are over, but, for now, the market risk is higher. The inability of the major stock indices to break back to the previous highs was a red flag in my view.

The current market action indicates caution and uncertainty. The one-day rally on November 18 appears to have been an isolated event based on the market action I’m seeing in the two days following. The DOW was down over 130 points on Monday before rallying in late day trading, but the selling bias continued on Tuesday, with the DOW down over 150 points in the morning to as low as 11,017, and breaching its 50-day moving average (MA) of 11,021.

Markets had rallied on November 18 on the news of a potential remedy to the debt situation in Ireland, which will be asking for about $137 billion in bailout funds to try to avoid a debt collapse that could have a domino effect on the European Union. As I have said, the expected solution in Ireland is encouraging, but it may be masking a much bigger issue in Europe as far as the mounting debt and deficit levels are concerned.

While the capital infusion will help remove some unwanted uncertainty from the market, I feel the remedy will merely disguise a much more significant issue in Europe in relation to the region’s mounting debt and deficit levels in several of the weaker countries. The issue I see is that problems in one country impact Europe and take away from achieving stronger growth due to the need to rescue a member. This cannot be good for Europe, which is struggling to grow.

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Also watch the tighter lending in China and the country’s desire to rein in growth, which would impact other global economies. The current concerns in China continue to be regarding the high, bubble-like real estate prices, but consumer inflation at 4.4% in October is also a serious problem that needs to be dealt with.

The Organization for Economic Cooperation and Development (OECD) predicts that China will grow its economy by 9.7% in 2011 and 2012, which, while lower than the previous rates, is still well above the global average of 4.2% and 4.6% in 2011 and 2012, respectively. In the third quarter, the country’s GDP increased 9.6% on higher inflation.

China wants to slow down its growth to between eight percent and nine percent over the next five years and focus on quality, according to South China Morning Post. The country’s foreign direct investment (FDI) surged 7.9% in October to $7.66 billion, according to the South China Morning Post. FDI in the first 10 months of the year amounted to $82.0 billion, up 15.7% versus the same period in 2009.

The apparent pursue of slower growth in China is not what the other global economies want to hear, as it will also impact economic renewal in countries that trade with China, and there are many.

My advice is to look at market weakness to accumulate shares. Also take some profits and consider using Put options to hedge against downside weakness.