Making Money Alert
Volatility, I Bow to Thee
11/30/2011
In the days leading up to the Thanksgiving holiday, we saw markets make a decided turn south. The S&P 500 Index broke below its 50-day moving average, and the broad measure of the domestic equity market had long since tumbled below its 200-day moving average. The move lower led me to conclude that we had entered into a confirmed downtrend. But after the holiday, buyers returned to the market, sending stocks up big on Monday -- and really big on Wednesday.
The catalysts spurring the big buying behavior were better-than-expected, record-high Black Friday retail sales and tremendous online sales on Cyber Monday. The confidence on the part of consumers was viewed widely as a big vote of confidence going forward.
Of course, the real market mover came before the opening bell on Wednesday, as central banks around the world announced joint action to give banks easier access to dollars. The news caused the major indices in the United States, as well as major markets around the globe, to soar.
The coordinated action by the central banks of Europe, the United States, Britain, Canada, Japan and Switzerland effectively assuaged worries over a credit crisis, and they did so by cutting short-term borrowing rates to banks, giving them much easier access to money.
The hope here is that the cheaper cost of capital to cash-strapped European banks will stave off fears that Europe’s debt crisis could morph into a pernicious meltdown of the entire euro-zone financial system. The thing markets fear most is a repeat of a Lehman-like global credit freeze similar to the kind we saw in 2008.
Certainly, traders have responded to the coordinated effort to help banks and increase global liquidity. But ask yourself this: Have any of Europe’s fundamental problems been addressed by this reduction in the cost of capital? My answer is no.
I am still of the opinion that Europe is headed for recession, and no amount of fiscal tinkering is going to prevent this eventual outcome. As to how much a euro-zone recession will negatively affect U.S. and other global markets remains to be seen; however, what you can bank on is that we are going to continue bowing to the gods of volatility for some time while traders sort it all out.
Keep in mind that despite the big buying during the past few days, we still are ending up November with about a 1.5% decline. Year to date, the S&P 500 is down about 1.7%, and that outcome has been reached via a 7% spike in September, and an 11% plunge in October. Once again, I bow to the volatility.
About the only way to survive such a volatile environment with your sanity intact is to have a trading plan that includes not risking a huge amount of your capital. That plan also has to have safeguards in place, such as stop-loss orders. You also need to avoid becoming either too bearish or too bullish during big swing days like today. Yes, the market could begin climbing from here, but it also could just as easily plunge tomorrow on downbeat news from Europe. We’ve seen this happen many times in the recent past, and it’s likely to happen again in the near future.
So, bow to the volatility -- and be prepared to cope with its consequences.