The bull ran in January, the bull ran in February, but the bull hasn’t run in March. In fact, the bull appears to have run out of air this month, and Tuesday’s 203-point Dow drop has left the 2012 bovine gasping for breath. Tuesday’s drop was the biggest one-day decline in months, and it came courtesy of soft readings on global economic growth, as well as concerns over a looming deadline for Greece’s debt swap with private bondholders.
For some time now, I’ve been warning about the potential downside in equities due to the pervasive problems with Europe’s economy. I think the region is destined to go into recession, and that will be a big negative for the global economy. The European Union (EU) represents about 28% of global gross domestic product (GDP), and a big decline in the EU’s contribution is going to mean more downside for China’s GDP, as well as more anemic growth here in the United States.
As we mentioned last week, the Dow was turned back at the 13,000 level. Since then, we’ve seen a decided wane in the bullish momentum. This wane during March has taken place not just in domestic stocks, but also in stock markets throughout the globe.
Take a look at the chart below of the Vanguard Total World Stock ETF (VT), a fund pegged to the price and yield performance of the FTSE Global All Cap Index.
As you can see, VT has fallen sharply in March after the huge run higher that we witnessed since mid-December. What this decline tells me is that the recent rally is very likely on its last legs, at least for the time being.
Ironically, I actually want to see more selling to bring stocks back down to what I expect will be support at the 200-day moving average. If that move takes place, we would be shaking out the weak holders and getting set up for another leg higher in stocks. I’ve actually been waiting patiently during the past two months for the market to do just that, as I think it will present investors with a new, low-risk buying opportunity.
The key here, however, is to play things right and not to jump the gun. This March-madness selling may turn out to be the correction I’ve been anticipating, or it may turn out to be a bearish head fake. As the old adage goes, the jury still is out on this one.
Still, if you’ve been waiting for a significant pullback in order to participate in the recent rally, the action in stocks of late is encouraging. If we see more selling in March that brings equities down to, or preferably below, their 200-day moving average, it could be time to hop on the equity train.
A Precious Pullback
One of the sectors I’m watching carefully right now is gold. Like equities, gold saw a huge run higher through the first two months of 2012. But since March, we’ve seen a decided downturn in the price of the yellow metal. If you look at the chart below of the SPDR Gold Trust (GLD), we can see the surge off of its December low that lasted through the end of February. However, the recent selling has taken the price of this fund down to its 200-day moving average.
The potential for a rapid decline in gold is something I wrote about in the special report,The Complete Guide to Gold Exchange-Traded Funds. In that report, I explained that when gold comes under the pressure of a correction, we usually see some very aggressive selling that takes prices down very fast, and in a very big way. We’ve already seen this situation in March, and there indeed may be more downside to come for gold.
The upside here is that when gold prices finally do settle in, there is a very high probability that we’ll see a big rebound in the value of the yellow metal, and the stocks tied to its fortunes. This jump would be due to fundamental factors, still very much in place, pushing gold prices higher.
If you’d like to find out more about these fundamental factors, and if you’d like to discover how the Fabian Gold Plan can help you make money in gold and gold ETFs, then I invite you to check out my Successful Investing advisory service. A new subscription to the newsletter also gives you access to my special report, The Complete Guide to Gold Exchange-Traded Funds.
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Twain on the Majority
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
I love the sentiment here in the great writer’s quote, because it serves as a stellar reminder that so often, running with the herd can get you trampled. Wise investors may be well served by Twain’s admonition, which right now means not chasing the gains we’ve seen in equities over the past several months.
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