Italian Debt Problems: Is Another Market Wipeout Coming?

| November 10, 2011 | 0 Comments

October was surprisingly good for the markets…

Signs of a resolution to the Greek debt crisis sent stocks surging last month.  In fact, the Dow is up a sweet 15% from the lows of October 4th.  Hopefully you took advantage of the opportunity to pick up undervalued stocks.

And now it’s November which, along with December and April, is one of the markets seasonally strongest periods.

In fact, according to Bespoke Investment Group, the Dow has gained an average of 1.22% in November over the last 50 years.  And over the past 20 years, the results are even better with the Dow up an average of 1.7%.

On a seasonal basis, it’s a great time to be invested in stocks. Historical odds are in your favor to catch nice returns as 2011 draws to a close.

But don’t load your portfolio with stocks just yet!

Unlike years past, there are some decidedly ugly economic issues the market has to deal with.

For example…

Now that Greece appears to be taken care of, Italy’s debt problems are coming into focus.  In fact, the Dow plunged 3% Wednesday on news of Italian bond yields surging above 7%.

That’s really bad news.


Yields at those levels mean Italy may not be able to roll over its debt at affordable prices.  And that means Italy’s economy (Europe’s third largest behind Germany and France) may need a bailout, just like Greece.

But there’s one big problem…

There’s simply not enough money in Europe to do it.  Italy is simply too big to bailout…

Remember the problems Greece caused for the markets this summer? Investors knew Greece could be bailed out if it came to it (which it did) and it still caused huge market dislocations.

With Italy, there’s no such luxury…

If Italian bond yields continue running higher, you can forget about a year-end rally in the US stock market.  In fact, with Italian 10 year bond yields surging above 7%, there’s a distinct possibility of another market rout- a wipeout just like we saw earlier this year.

So what should you do?

If you caught the rally from the early October lows, just sit tight.  It’s still possible the market can work through Italy’s debt issues without losing too much ground.

There’s even a chance of a market-favorable solution to Italy’s problems.  In which case, stocks are highly likely to rally into year-end.  At that point, you can add to stock positions you bought in early October.  Then you’ll be positioned nicely rolling into 2012.

On the other hand, if things get worse in Italy, be prepared for another big market downdraft…

Now I know that may sound scary, but whatever you do, don’t freak out.  Panicking when markets drop is for amateurs.  Pros look at uncertain times like these from an opportunistic viewpoint.

Just make sure your downside risk is in check and get your shopping list ready.  You could get another chance to pick up deeply undervalued stocks in coming months.

Bottom line…

No matter what happens, you can expect plenty of gut-churning volatility as 2011 draws to a close.  And even though we’re heading into a seasonally strong time of year, Europe’s debt situation will take center stage.

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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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