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Are The Stock Markets About to Blink?

Stock-Markets / Stock Markets 2012 Apr 03, 2012 - 06:01 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleShah Gilani writes: The stock market is off to its best start since 1998, but now what?

The markets could continue drinking the good times Kool-Aid ...

Or April could be the last hurrah before a May hangover has us all reaching for the Alka-Seltzer again.


What do I see and what will I be doing and advising my subscribers to do?

I'll tell you.

I've been a cautious bull since October and participating in the run-up, as I recommended you all do, too. But, as I've said, I've been too cautious and haven't beaten the lofty middle ground of the three major averages, which was 12% for this year's first quarter.

That's mostly because the Nasdaq Composite, now at 3,091.57, rose a whopping (as in crazy hot) 18.7% in the quarter.

How much of that rise reflects the shine of a single stock, Apple Inc. (Nasdaq: AAPL)? If you've read my articles on the Apple effect, you know how much. It's a lot.

The Dow finished the week and the quarter at 13,212.04. That's an 8.1% quarterly run. The Industrials are only 952 points, or some 7%, from their all-time high posted on October 9, 2007.

As for the more widely watched S&P 500, it rose 12% in the first quarter.

If the average of the averages, which is 12%, was to continue at this pace, we'd have a 50% gain in equities this year.

Is that likely?

Yeah, about as likely as you winning that mega lottery.

I'm a momentum player. That means I don't fight the tape (the tape, as in ticker-tape, was the old way of reading stock prices), but go with the flow. And I'll continue to maintain my long positions.

However, I'll take cautious over greedy any day, so based on some "stickiness" I see on the path ahead, I'm making adjustments starting this week.

Here's why.

European Woes Have Not Gone Away
Europe may be on the verge of blowing up again.

It's complicated, but it "bottom lines" down to this: There's a lot of money to be made (on the short side) by hammering away at European stocks and bonds. And hedge funds and other big-time institutional players want to crack them to make massive amounts of money in short order.

Because the ISDA (the private derivatives authority) declared Greece in default, finally credit default swap holders got paid. What happened earlier was that the ISDA said Greece's bond swap, because it was "voluntary," would not constitute a default event.

CDS holders began selling their positions in anticipation of not collecting on them.
In the final analysis, after the paring down of positions and the final netting of outstanding swaps, there was only about $5-$6 billion (principal coverage) left in outstanding claims, and they got paid off.

It was a game of chicken. European governments and the ISDA knew that all hell would break loose if Greece's bond swap would be a default event. It was rigged so it wasn't, until it was, which of course it was (a default) all along. That won't happen again.

Players are going to go after new prey and try and hammer down prices to trigger a panic sell-off. And my guess is, it will happen.

For one thing, Greece holds elections (supposedly) in May. My guess is that Greece will elect new leaders, and they will opt to default on their outstanding debts, exit the Euro-zone currency mechanism, and return to the drachma, but stay in the European Union.

If that happens, all hell WILL break loose.

Why do I think that will happen? It's the only way for Greece to survive and get back on its feet. It can't grow its way out of the harsh austerity being imposed on it by the EU and IMF.

By reverting to the drachma (which will be dirt cheap and impose its own kind of austerity), Greece's exports will be cheap on world markets, and tourism, which is Greece's biggest money-maker, will explode. They will work themselves back to reasonable growth in less than three years, as opposed to maybe 10 years to a generation under the current boots-on-their-neck scenario.

Spain's bond yields are creeping up (here come the players). Spain is not Greece. It is Europe's fourth-largest economy. The new government there wants to fix its fiscal problems and mounting debt by taking one giant axe swing at the economy.

Unemployment there is already more than 20%. And they're going to cut government spending by 17%, in a hurry? Good luck with that. It's going to be a hot (as in fire from riots) summer in Spain.

And don't take your eyes off Italy. They're in better shape than Spain, but not out of the woods by any means.

France holds elections on April 22. It's going to be Sarkozy vs. the Socialists. The French being the French, it's going to be a fashionable fight with lots of mustard being hurled.

Like the rest of the European Union countries voting on the fiscal compact their leaders agreed to, France is going to have to listen to its voters. So far, we've heard what European leaders say. We haven't heard from the citizenry, and they're starting to speak.

Next Up on My Worrywart Chart: China
The Shanghai Composite is down 8% since March 2. In the past, the markets have been a good barometer of the economy.

Is this leading indicator pointing to a hard landing? Or will China bounce back from here?

There's some real deep political stuff happening over there. Chances are, what's out of the bag will be put back in and covered up quickly. That will likely mean that whatever discontent may be fostering under the veneer of what the Communist Party wants the world to see, the way to mollify its people is to give them more growth and more money to play with.

So, I expect the Chinese will ease up monetarily and they will push growth again, even though they just came out a few weeks ago and said they wanted quality growth over quantity.

We'll see. If there are deeper problems in China that can't be glossed over, look out.

Here at Home... Sure, things are looking a lot better in the U.S. It's just a matter of keeping the momentum going.

Last year at around this time, we were fearful of the end of the Fed's QE2 program. Markets sold off in May, and we had a volatile (to say the least) summer.

This year, Operation Twist is scheduled to end in June. Will markets react the same way to a less-than-likely addition of liquidity via a QE3?

The markets have been on a tear. But I believe it's time to raise all your stops and time to start selling calls against all your long positions.

Why not? By selling calls you not only add some minor protection (it will be minor if there's a big sell-off); you also collect some income you get to keep if the markets stagnate here but don't drop back.

And if your stocks go higher and you get called away, are you going to complain that you took profits?

If you get called away and you want to get back in, you can buy more stock. Or better yet, sell some puts to collect more premiums. And if the stocks go down and you get assigned on your puts (meaning you have to buy the stock at the strike price of the puts you sold), you get back in lower than where you sold to take your profits.

We have a busy week ahead, and things have been on a good and smooth trajectory.

But I'm starting to get this little thing in my stomach that makes me squirm enough to blink.

And you know what blink means... don't you? No? Then check out Malcolm Gladwell.

Source :http://moneymorning.com/2012/04/03/wall-of-worry-its-time-to-make-these-two-adjustments/

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