Stocks sold off sharply in Tuesday’s trading session, with the Dow sinking more than 100 points. The decline was the single-biggest, one-day slide since late June. Moreover, stocks now have fallen four straight sessions. Midway through today’s session, stocks were on pace to log yet another loss.
So, the logical question here is — where did the quantitative-easing (QE) bounce go?
In fact, since the Federal Reserve issued its proclamation that it would expand its existing mortgage-backed security purchase program to $40 billion per month for an unlimited period of time, the market has seen a lot of selling. The selling-related pullback is true not only for the major equity indices, but also for commodities such as oil, precious metals and even bonds.
I bring this up because most financial advisors will tell you that you MUST be invested in this post-QE market, because, as one pundit I heard put it, “the Fed has got your back.” The theory here is that the central bank won’t allow a stock market decline. Unfortunately for this thesis, the central bank doesn’t control events around the world. In fact, global risk events have come roaring back to center stage now that the Fed is essentially out of the way, and that’s bad news for the bulls.
Headlines out of Europe and, in particular, Spain and Greece, have caused investors to worry about the future success of the European Central Bank’s (ECB) rescue plan. Violent anti-austerity protests in Madrid are pressuring Spanish Prime Minister Mariano Rajoy as he gets closer to formally asking the ECB for bailout funds.
In Greece, an anti-government rally and general strike turned violent today, as new austerity measures planned for the country in front of an ECB rescue plan are wrecking havoc in that society. The fact is that Europe remains a hot zone of fiscal trouble. Now that the Fed is essentially out of the way, investors are focusing more on this trouble and trading out of riskier assets.
In Asia, we have territorial tensions heating up between China and Japan over islands in the East China Sea. Those tensions have caused some Japanese businesses such as Toyota and Honda to shut down production in their China facilities. The tensions also have caused stocks in the Shanghai Composite ($SSEX) to plummet during the past week. The chart above shows just how far the index has fallen in the past 52 weeks.
The bottom line here is that the world remains a dangerous place for investors. Yes, money can be made if you’re smart, but not if you buy into the rhetoric that everything is fine just because “the Fed has got your back.”
Be cautious, and be careful. And remember that those who preserve their capital first are the ones with the biggest booty in the long run.
The Devil’s Finest Trick
“La plus belle des ruses du diable est de vous persuader qu’il n’existe pas.”
—Charles Pierre Baudelier, Le Joueur Généreux
Pardon my French, but this famous Baudelier line has to be read in its original context to be fully appreciated by language lovers. The translation here is, “The finest trick of the devil is to persuade you that he does not exist.” That’s a great line, and it’s one that applies to the investment community. You see, one of the finest tricks of Wall Street is to persuade you that stocks are always safe, and that when they go down it’s always a buying opportunity. This is certainly true some of the time, but definitely not always. When it comes to investing, you have to know when to buy, and more importantly, when to sell. That’s the angelic wisdom your broker doesn’t want you to know.
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To the best within us,