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Should European Markets Plunge Worry US Investors?

  • Written by Syndicated Publisher No Comments Comments
    August 8, 2014

    There were a lot of examples of instant analysis recently, pointing out that Europe’s markets were down on increased concerns about the Russia/Ukraine situation.

    But has the problem not more likely been related to economic reports and the actions that may or may not be taken by European central banks?

    In just the last few days, Germany’s Federal Statistics Office reported that Factory Orders plunged 3.2% in June after declining 1.6% in May. Incoming orders from other Euro-zone countries plunged 10.4%.

    Moody’s rating services downgraded U.K. banks from stable to negative.

    It was reported that Italy’s economy has unexpectedly slid back into recession (its 2nd since the 2008 meltdown), its GDP coming in at –0.2% in the 2nd quarter after sliding into what was thought to be temporary one-quarter negative growth of –0.1% in the first quarter.

    It was reported this morning that Germany’s Industrial Production declined 0.5% in June, widely missing the consensus forecast of a gain of 0.3%.

    The London Telegraph this morning says that homeowners in London are dumping real estate on the market on fears they have run out of time to cash out on the run-up in real estate prices since the 2008 meltdown.

    Meanwhile, retail sales in the euro-zone have been plunging.

    Meanwhile, Europe’s stock markets were tracking closely with the U.S. market, with impressive resilience and making fractional new highs.

    The U.S. market has topped out in the last 10 days into a short-term pullback (as called for by our short-term technical indicators).

    And in their decline the major indexes did break below their 50-day moving averages. But the S&P 500 is only 4% below its recent peak.

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    However, European markets led the way, topping out in June, and are down twice as much as the U.S. market.

    Perhaps, of more importance, the first rally attempt after a decline is usually important, for instance whether the market can break back up through the 50-day and turn it into support again, or finds it to now be overhead resistance

    European markets have already experienced their first rally attempts, and they failed at their 50-day moving averages.

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    The U.S. market is now short-term oversold. We may soon see how it handles its first rally attempt.

    Is it just another 3 to 5% pullback that will pop right back above the m.a., or are European markets now showing the way down from record peaks?

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    On the VIX Index.

    Saw a couple of opinions yesterday that the “spike-up” of the VIX Index, aka the Fear Index, indicates previous investor complacency has already been replaced with bearishness and fear seen at market lows, and is triggering a buy signal.

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    I suspect it’s been so long since the charts have seen even a 10% correction (2011), that they are misleading in a number of areas where folks don’t look back far enough to see the levels of the indicators in normal corrections.

    It is true that the current level of VIX is getting close to levels that marked buying opportunities for the 3% to 5% dips of the last couple of years.

    But the next chart shows how high the VIX rises in normal corrections before it indicates a potential low.

    Its current level is still well down in the low fear (high bullish) zone. The heavy blue line is the level we have shown over the years as the minimum level of fear usually reached before intermediate-term corrections end.

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    So whether VIX is signaling a buy depends on whether this is just another 3 to 5% pullback or the beginning of an overdue 10% to 20% correction.

    By the way, I don’t know if this is true or not, but a couple of traders told me “There are a bunch of amateurs getting killed with the latest fad of trying to trade the VIX’ volatility.”

    Sy’s interview on U.S. and China markets.

    Steven Halpern interviewed me last Thursday on the MoneyShow.com, on my outlook for the U.S. and China markets.

    If you would like to hear the interview or read a transcript of it, click here.

    http://moneyshow.com/articles.asp?aid=DailyGuru-40679

    To read my weekend newspaper column click here:  Buy the Dip, Bail Out, or Just Worry

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

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