Stock Market Today: A Red-Line Overload and No Aces to Play

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By ETF Stocks

Stocks are rolling down the backside of a mountain and don’t appear as if they’ll stop until they hit the base. Meanwhile, volume is increasing the lower the indexes go, which usually means more selling is on the way.

ETF Stocks would rather see the number of shares traded shrinking as equity prices drop. That’s a sign that investors are hesitant to part with their shares at current prices. Accelerating volume is an indication that Wall Street isn’t done painting the tape red.

As we analyze the NASDAQ’s chart, ETF Stocks can envision the index chasing away all of 2012’s gains, as the Dow has done and the S&P is 20 points away from doing. It really looks to us as if the indexes are putting upside down V patterns of their charts.

The technical shape isn’t always symmetrical, but usually close. That would put the NASDAQ’s base somewhere between 2650 and 2600.

A close below 2600 and the NASDAQ crosses below a MAJOR support line putting the market in danger of dropping more than 20% from its peak i.e. a bear market. This story-line played out last summer with Greece's debt woes. However, this time is different from 2011 as Spain’s economy is five times larger than Greece based on GDP.

Spain being sucked down the debt vortex like water draining out of a tub will pull all the EU and world markets with into the gutter with it. It doesn’t help that China’s economy is landing harder than most experts predicted (is there ever a “soft landing”?). Could it be any other way with China's number one trading partner, the European Union, in the grip of a recession, maybe the beginning of a real nasty contraction?

The situation has the stock market seemingly on the edge of spiraling out of control. As a result, the Federal Reserve might feel the need to intervene before their official meeting later in June. While, more stimuli from Ben Bernanke and crew might be good for gold and spark some inflation, a premature move from the central bank could reek of panic.

Desperation is the last thing Wall Street needs. Bernanke throwing in the kitchen sink could trigger unexpected results and bring memories of October 1987 and 2008 back. Investors need to protect what they have, and perhaps even add some insurance with an inverse ETF like ProShares Short QQQ (PSQ). The exchange traded fund seeks to deliver the opposite performance of the NASDAQ 100. In other words, if the 100 drops 3%, then PSQ will gain roughly 3%. 

While we are always weary of chasing the market or stocks as they accelerate in either direction, there is no doubt that the market is in a dangerous spot. In times like these, you must practice caution. The Fed has few only few cards left to play, and all the face cards and aces are out of the deck with interest already at net negative rates (fed rate – inflation) and the government $16 trillion in the hole.

Who knows, at this point, butterfly nets, the biggest you can find, might be the best investments. You’ll need them for when the helicopters start dropping money to the masses from the sky. It sounds funny, but nothing else has worked.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs , Investing Ideas , US Markets

Referenced Stocks: PSQ

ETF Stocks


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