The market’s taken a stiff smack over the past week, and that’s chiefly due to European voters. Over the weekend, elections in France and Greece clearly demonstrated that citizens in both countries have rejected fiscal austerity measures deemed necessary by the European Union in order to receive billions in bailout funds.
In France, voters elected Socialist Party leader François Hollande as president, summarily dismissing incumbent Nicolas Sarkozy and his deal with the German-led European Union bailout plan. Hollande has publicly stated that he plans to shift the burden of economic hardship onto the rich, and that he wants to soften the current Sarkozy-negotiated austerity measures.
In Greece, votes also vetoed austerity plans, as citizens rejected the two incumbent parties in a preliminary election, opting for smaller, far-left and far-right parties. The political uncertainty over Greece’s fiscal future is really the fly in the European bailout ointment, and if that plan is foiled, we could be looking at a lot more selling in markets around the globe.
Now, speaking of that selling, midway through today’s trading the Dow was down over 1%, and if the industrial average finishes lower today, it will be the sixth-consecutive down day for the bellwether index. The market hasn’t seen that string of sell-offs since August 2011.
As for the broad-based S&P 500 Index, we’ve seen a decline of more than 4% since last week’s Alert, and that’s definitely a strong pullback that could lead to the decisive correction I’ve been warning you is on the way. The chart above shows the drop in the S&P 500 since May. As you can see, the index remains well above its 200-day moving average; however, it now is well below its 50-day moving average.
As for European markets, they already have plunged below both the 50- and 200-day moving averages. The chart below of the iShares Europe 350 (IEV) clearly shows the breakdown in the value of the biggest stocks traded in Europe.
Could the S&P 500 be the next major index to break below its long-term trend line?
I suspect the answer is yes, and that means you have to proceed with extreme caution with your money. In fact, now definitely is not the time to be buying into this market. The smart investor will exercise patience, and wait for stocks to settle down here before jumping into stocks again.
There is just too much uncertainty over Europe right now to risk it, and of course, there’s plenty of uncertainty here at home as well. Last week, we received what can only be described as a pitiful April employment report with far fewer jobs created during the month than the already low estimates suggested. The jobs data, along with the renewed uncertainty in Europe, has made this market just too dangerous to touch.
Until these circumstances change, I say exercise that safest of all options — patience.