Don’t get too comfy trading the markets. Yes, the bias is positive and investors continue to be bullish, as they support the market after the rally.
Yet, as I see it, there continues to be market risk that could result in a correction. We recently had a two-percent setback, but not enough to classify as a correction. In a normal and healthy uptrending market, you would want to see some profit-taking along the way. So far, this has been largely absent, which is a concern.
There are concerns regarding the scale of the Federal Reserve’s second round of quantitative easing, also known as “QE2.” Some are speculating that QE2 could be smaller than many are hoping given the upcoming midterm elections on Tuesday and massive deficit/debt.
The third-quarter gross domestic product expanded as expected at a two-percent annual rate, up from 1.7% in the second quarter. Yes, there is growth, but the GDP reading, while positive, continues to be flat and this could drive the Fed to increase its QE2.
The key Durable Goods Orders for September increased 3.3%, above the estimate of 1.8% and the negative one percent reading in August. But here is the problem: the number was due largely to a rise in commercial aircraft orders. Excluding transportation, Durable Goods actually fell 0.8% compared to the estimate calling for 0.2% growth and were down from 1.9% in August. In my view, the reading was a disappointment and continues to point to fragility in non-essential spending.
In addition, the Consumer Confidence Index reading edged lower to 50.2 in September versus 53.2 in August, but it was above the estimate of 49.2. A red flag is that the reading was the weakest since February. A reading of 90 indicates a healthy outlook, so we are quite a way from the pre-recession times.
The Case-Shiller 20-city Index declined 0.2% in August from July and continues to point to soft home prices and high foreclosure sales.
Economist Nouriel Roubini, also known as “Dr. Doom” for calling the housing market collapse, suggested that the U.S. is a “fiscal train wreck” that could see the country face stagnation with slow growth, high unemployment, and deflation.
Overseas, unemployment in the Eurozone, as in the U.S., continues to be a major problem. In September, unemployment in the Eurozone surged to a 12-year high of 10.1%.
In Japan, after cutting its 2011 and 2012 GDP estimates yesterday, the country’s industrial production declined for the fourth straight month.
With continued problems in jobs, housing, and flat spending, you really need to take a step back and be watchful towards the prevalent risk in the stock markets. Yes, ride the wave and don’t fight the trend, but you should also be mindful and prudent with your trading.