The market may remain weak

The downward stumble could continue until news triggers a reversal.

By Jim J. Jubak Apr 5, 2012 4:55PM
The only vaguely reassuring thing about Wednesday's stock market retreat is that we've been over this ground before.

Of course, that experience does, worryingly, suggest that this downward trend is likely to go on for a while.

Let's review the milestones on this path:

1. Bad news from some debt-burdened eurozone country (was Greece, is Spain) sends bond prices tumbling and yields climbing in those countries, and sends the euro down against the dollar. Wednesday afternoon, the euro was down 0.71% against the dollar. Thursday, it was down another 0.63%.

2. The dollar and other safe-haven currencies such as the Japanese yen climb against pretty much every global currency, even those far away from the eurozone debt crisis. For the U.S. dollar, that continues an upward trend in evidence on Tuesday when February’s minutes from the Federal Reserve Open Market Committee showed very little inclination toward a third round of quantitative easing. 

The U.S. Dollar Index, which had been in decline (a decline that extended the March rally) since it hit 80.565 on March 14, hit a temporary bottom at 78.82 on April 2. It has since rallied on the Fed minutes and on bad news from Spain to 80.084 Thursday afternoon.

3. A rising dollar is bad for commodity prices and for prices of commodity stocks. Wednesday, gold was down 3.2%; West Texas Intermediate crude was down 2.2%; Brent crude was down 1.9%; and copper was down 3.2%. Shares of Freeport McMoRan Copper & Gold (FCX) were down 1.9%; shares of gold miner Newmont Mining (NEM) were down 4.9%; and shares of U.S. oil producer Pioneer Natural Resources (PXD) were down 2.5%. Thursday, commodities and commodity stocks have, in general, recovered about half of their losses.

4. With European and U.S. stock markets selling off, risk-averse or simply spooked investors sold down emerging market stocks too. Brazil, one of the few emerging stock markets open when New York is open, was down 0.9% yesterday. Shares of Chinese stocks that trade as ADRs in New York were down as well. Baidu (BIDU) was down 1.8%. That's not as big a drop as the German DAX Index (2.8%) or the Spanish IBEX 35 Index (2.1%). Asian markets followed the European and U.S. markets down when they opened for trading Wednesday night.

5. Once the market has started on a trend -- either up or down -- it will continue on that trend until some bit of news creates sentiment for a reversal or until prices get so cheap or expensive that they cause their own trend reversal. Spain and Italy (especially Italy) have a heavy schedule of bond auctions in April with Italy auctioning bonds on three days next week and on three days in the week of April 23. If yields continue to climb during those auctions, it will keep the current risk-averse trend in place and keep downward pressure on asset prices.

6. The one thing that's different this time is that this scare comes after a big rally in global stock prices. That's likely to increase the propensity of investors and traders to sell in order to protect their gains. (When investors are underwater, they will often hold, hoping to get back to even. When they’re in the black, they tend to sell to protect gains.) You could see that in Thursday’s market action when some of the stocks up most recently took the biggest hits. So, for example, JPMorgan Chase (JPM), F5 Networks (FFIV), and Coach (COH), all stocks with good runs in the first quarter, were down Wednesday by 2.3%, 2.2%, and 1.2%, respectively.

In my opinion, even if we get a partial recovery Thursday -- and remember that this is a short
week since the New York markets are closed on April 6 for Good Friday -- the downward bias in
the markets will run until we get some kind of temporary reversal on the negative news from Italy
and Spain on bond yields. Thursday afternoon, the Standard & Poor's 500 Index ($INX) and the Dow Jones industrials ($INDU) were both down slightly.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Baidu, F5 Networks, Freeport McMoRan Copper & Gold, and Pioneer Natural Resources as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

2Comments
Apr 6, 2012 12:18PM
avatar
There is no good news in the horizon.  The smart money are leaving the market like rats on a sinking ship.  Europe can not find enough money fast enough to keep those countries that are too big to fail afloat.  The US is dealing with higher foreclosures and lower job numbers.  The Fed said no QE3 for now.  This is pretty scary stuff.  Maybe it is time to call it a day and wait for a better market.  Smile  
Apr 6, 2012 2:19PM
avatar
Well thought out and well written -  Thank you
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

108
108 rated 1
257
257 rated 2
439
439 rated 3
626
626 rated 4
499
499 rated 5
530
530 rated 6
713
713 rated 7
522
522 rated 8
339
339 rated 9
136
136 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
EOGEOG RESOURCES Inc10
SWNSOUTHWESTERN ENERGY COMPANY10
TAT&T Inc9
COPCONOCOPHILLIPS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.