Should you buy on the market dip?
A collapse in the Japanese markets is weighing on US stocks. Is it an opportunity or a warning sign?
The reality distortion field that had been bolstering global markets has been shattered violently over the past 36 hours, starting with heavy volatility and steep losses in Thursday's Japanese trading session that continued into Friday. The NYSE Composite is moving below its 20-day moving average for the first time since early April as cyclical, economically sensitive stocks pull back.
The Dow Jones Industrial Average ($INDU) has had a particularly wild ride, dropping more than 300 points from its intraday high on Wednesday.
The question is: Should investors buy on this dip ahead of continued gains or take it as a sign to get out of stocks?
To answer that question, one must ask another: Can the status quo continue?
I don't think it can. And as a result, now's the time to book long side profits and move to cash for conservative investors. For more aggressive traders, it's time to prowl for short side opportunities.
That's because the "Goldilocks" scenarios the bulls have relied on for months is finally ending.
Japan can no longer freely destroy its currency and actively try to create inflation without causing damaging energy import price inflation and roiling its vulnerable government bond market -- pushing borrowing costs higher and risking insolvency while also shaking its financial system. Japanese banks have gorged themselves on ultra-low yield JGBs. As yields rise, bond prices fall and pinch bank balance sheets.
Europe can no longer watch a stronger euro push down the borrowing costs in troubled sovereign countries without suffering a collapse in German export competitiveness as recession spreads to the core of the eurozone project. Not good.
And the United States can no ignore the fact that the Federal Reserve's bond buying -- which is nearing a technical limit as the Fed already owns nearly one-third of all five+ year Treasury bonds -- isn't having an impact on the real economy as the data continues to disappoint to the downside.
And the catalyst for all this reality is the prospect that the monetary policy stimulus could actually end. That started on Wednesday with comments from the Federal Reserve chairman
Bernanke and the release of the May 1 meeting minutes where participants openly voiced concerns about asset price bubbles. With the fundamentals so weak, this market has been fueled by nothing but cheap money liquidity and sentiment.
When that is threatened, people quickly hit the exits since, unlike a fundamentals-based rally, there is an underlying understanding that prices are built upon the greater fools theory; not a turn in the business cycle or a rebound in corporate profitability. Just look at the way the Chinese flash PMI (shown above) is rolling over -- which was another negative catalyst on Thursday. Or how recent regional manufacturing data suggests a deflationary recession could be taking hold (shown below).
So everyone knows it'll be a race for the exits when it turns.
There's a lot of pent up selling pressure, and the bulls are still fighting tooth-and-nail to contain the market's willingness to drop. So we're far from a cathartic, selling climax this market hasn’t had -- and is long overdue for -- since November.
Disclosure: Anthony has recommended EDZ and FXP to his clients.
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However, it will take more than a day or a week to end the Bull Run. That is unless we have another Black Friday. The status quo has always been suspect, and Uncle Ben knows that all too well.
Anybody following your advices would go nuts or broke, or both!!!!
It really doesn't take anyone seeking answers to questions like: should we buy on the dip? To see the false economics unraveling. 5th day of rioting in Sweden. Bomb threats on airliners. No pulse in any European nation. China in a recession. We had a choice back in 2007... believe Hank Paulsen as he waved empty pieces of paper in the air screaming- Save the banks... or tackle the fool, illuminate the scam and incarcerate every alumni in on it. You printed us into catastrophic loss and failure, Mr. Ben Bernanke, get out and recover all that fake cash from every greedy grubber hoarding it and let's get going on a REAL 21st Century economy. History will look back and ask: who was the stupe who let all those groups gain power over individuality? Obviously, one or more persons who otherwise was weak and incapable of succeeding in life without changing the rules. I wouldn't put a penny in this rigged and toxic market. The "correction" will be globally personified. Expect cataclysmic, be relieved when you emerge with your skin still intact.
Let's face facts folks.
Japan is bankrupt and the BOJ has to print money just to buy it's government issued debt
Europe is bankrupt and has to print money in a werid way as they are not allowed to out right print money in order to by it's government issued debt. And rely on Japan and the US to supply any short fall in money.
USA is bankrupt and the Federal Reserve has to print money just to buy it's government issued debt.
There is no way out of the mess as none of the above countries are producing any wealth. To produce wealth you have to build something of value to other people. Currently all we are building are mountains of debt.
The only way this is going to end and it will end before 2015 is in total collapse.
Which is exactly what the Anti-Christ wants to happen so he can come to power by solving the mess by creating a new world currency and allowing people to exchange their useless money for his money and an oath binding you to his new world order upon pain of death.
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