George Maniere: Markets Brace for More Volatility

InvestingAdvicebyGeorge – Last week was one of the most volatile weeks in the history of the stock market. In my opinion the cause of these wild swings and the subsequent spike in the VIX has been a loss in confidence in investors. The wild swings we witnessed in the market is proof that after three years from a near Armageddon in the financial markets we are far from having an economy that is recovering. There is not a doubt in my mind that we will be in for more volatility in the market because our leaders have been unable to deal with the core issues of a staggering debt and a stagnating economy.

This week, French President Nicolas Sarkozy and German Chancellor Angela Merkel are scheduled to meet to discuss Europe’s problems. While the 300 pound gorilla in the room is the eventual breakup of the Euro Zone I am sure that will not be the topic of their discussion.  At this most crucial time, they are not going to discuss anything that would actually lead to a solution of their debt crisis. I’m sure they will confine their remarks to issues like improving economic stability. While there is no doubt that European stability needs all the attention it can muster, I believe this meeting will be less about ending the crisis that is staring them in the face and more about preventing future problems.

While not everyone shares my views I have positioned myself for more market trouble. No one can argue that corporate profits have been exceptionally strong as of late and that makes stocks look very inexpensive. I contend, however that it will be difficult for companies to repeat their strong profit gains as there is only so much fat that can be trimmed from the bone. Sooner or later these companies will have to produce real growth. There are only so many good earnings that can be reported before real wealth creation takes place.

From the market standpoint, this current situation is very reminiscent of the market troubles of the 1930’s and the 1970’s but this time on steroids. In the two eras I have mentioned it took well over a decade for the world economies to recover. In today’s world we now have to factor in China, India, Russia and Brazil. A return to a recession or worse a double dip in our economy would cause a global ripple effect that would have disastrous consequences throughout the world.

Yesterday we saw a run up of 214 points on the Dow to close at 11482.90, 26 points on the S&P to close at 1204.49 and 47 points on the NASDAQ to close at 2555.20.  I am not buying into this for one minute. I believe that there will be strong volatility still ahead and I have positioned myself for a retest of last week’s lows. If we can hold these lows we may have put in a level of support. Very often just like a stock a sector like the S&P will retest support levels more than once. Every time they retest that support level it gets a little weaker. If that support level can show the strength to hold this level of support we know we have found a bottom. That’s when you start buying in.

Today our old friend gold was selling off, as it had for the last couple of days when it did an about face and closed up in a show of strength. It seems no matter how oversold gold is, it continues to rise. I attribute this to a loss of confidence, our staggering national and European debt and a continued stagnating economy. The spot price of gold closed up $20.00 at $1770.00 and the gold ETF (GLD) closed up $2.00 at 171.80 and continued trading higher in the after markets at $172.19. The silver ETF (SLV) also put in a show of strength and closed up 1 ½ % at $38.67.

So in conclusion, until confidence has been restored to the markets, I see Gold and Silver as the only safe ports in these most perilous economic waters.

I found this link on my copy of the Wall Street Journal (online). Dr Nouriel Roubini talks about the current state of the economy. Like him or not, he certainly brings a very interesting point of view.

About The Author – George has been an investor for 30+ years. When he retired in 2004, he took over the control of his investments full time. In March of 2009 he committed a sizable stake to the market and doubled his money. he sold half about a year ago and what he started with is in drips dividend reinvesting. The other half he have been a bit more speculative with, but he recently bought SLV at $26.00 in January and sold it all on April 29th for a 66% realized gain. He spends my time reading every financial classic he can get his hands on and has become a fairly good chartist.


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