Is Another Summer Market Crash Coming?

| May 18, 2012 | 0 Comments

Investors are getting worried…

European news headlines are growing more grim by the day. By the looks of it, last summer’s patchwork Greek bailout is pulling apart at the seams. Whispers of bank runs, contagion, and European economic apocalypse are everywhere.

As if that’s not bad enough, the strength of the US economic recovery is also being called into question. April’s non-farm payrolls report was much weaker than expected, and recent manufacturing data isn’t so hot either.

Take a look at the market’s reaction to all this worrisome news…

S&P 500 Large Cap Index Chart

Clearly, the past couple weeks haven’t been so hot for the bulls (blue circle). Ever since the S&P 500 surged to 1,405 in early May, investors have run for the exits. To make matter worse, bears have controlled the past 11 out of 12 trading sessions.

It looks bad, I know. And due to all the red flags above, many investors are convinced it’s about to get a lot worse. Some say a repeat of the 2011 summer market wipeout is right around the corner.

Before you run for the hills, listen up…

Take a deep breath, step back, and put the recent market weakness into perspective. Since pushing to yearly highs in April, the S&P 500 is down a mere 8% while the Dow is down a little over 6%… not a big deal.

What’s more, if the S&P 500 continues down to test 1,280, it will be a 10% correction from the April highs.

To some, that may sound scary…

But in fact, a correction of 10% is completely normal within the confines of a bull market. The only investors who should be worried right now are those who bought at 1,400 or higher. If you did, cut your losses now and buy back into your favorite stocks once this correction runs its course.

By the looks of things, you won’t have to wait very long.

The markets are oversold at current levels and bulls are highly likely to step back in next week. Take a look… 

S&P500 Large Cap Index Chart 051712

As you can see, the recent sell-off is pushing the S&P 500 down to 1,280… where the market opened for the year.

But more importantly, notice how the 200-day moving average (dma) is sitting in the same area. This highly important technical support will give market bulls a chance to reassert their dominance.

And let me remind you…

The gloom and doom European news is merely speculation at this point. The markets are simply pricing in the possibility of things getting worse for Europe.

Maybe it will happen, maybe it won’t.

I tend to think it won’t…

Now, I’m not naive enough to tell you everything is hunky dory across the pond. But I just don’t believe the European Central Bank (ECB) and the International Monetary Fund (IMF) will stand idly by while Greece goes belly up.

There’s just too much at stake… namely Spain and Italy. If Greece leaves the Euro, you can bet your bottom dollar that Spain and Italy will want to do the same thing.

And believe me, that’s simply unacceptable.

Bottom line…

Now’s the time to have your shopping list ready. Stocks have fallen too far too fast in recent weeks. The smart money trade is to be a buyer of this weakness.

Until next time,

Justin Bennett

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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