After the markets closed on Friday, credit rating agency firm S&P stripped the U.S. of its AAA credit rating. Although one could argue that the market has been expecting a downgrade of some sort for weeks, its actual arrival should bring on more selling pressure for stocks. The natural reaction would be to think that it would be bad for treasuries more than equities but we think the market still believes treasuries are the safest place to be; the nicest house in a bad neighborhood if you will.
Investors have been reading about the sovereign debt issues in Europe for months and now that some of those same issues are coming to the forefront here at home people are nervous of how the overall economy will be impacted. Obviously, the markets have sold off hard, trading lower 9 out of the last 10 trading sessions, but that doesn’t mean we’re due for a bounce. As a matter of fact, we think any bounces should be used as an opportunity to reduce exposure to stocks or get short as the technical back drop has been severely weakened and is hinting at more downward pressure.
All five major indexes we follow (Dow, SnP, Nasdaq, Russell 2000, Midcap 400) have broken down to their lowest levels since at least November 2010. Friday’s lows will become key levels to watch in the near term as the markets bounced very hard off of them. Our fear though is that any further continuation of this bounce will be used by most (as we recommend ourselves) as an opportunity to reduce exposure to the market. Also, any break below this levels (which we favor as the most likely outcome) will almost certainly lead to a test of 1,150 on the S&P500 with a risk for a move even lower to 1,100 and possibly yet even lower.
Amidst all this market turmoil we recommend looking for stocks or other securities that have held up relatively well. Gold continues to trade to record highs, and Caribou (CBOU) closed at a 10 year high on Friday as well. While many market players choose to buy things that appear “cheap,” we would rather buy things that appear “strong.” With market downturns like this most recent ones comes opportunity, but don’t over complicate things. This may sound counter-intuitive but it can prove rewarding to buy stocks that confuse you as to why they haven’t gone down with the market and in some cases creates a certain sense of stubbornness that keeps you away from that stock. When really such strength can be representative of significant institutional support and providing a much better buying opportunity than you really think.
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