Market Head Fakes Fleecing Unwary Investors
I have to admit I’m really happy NBA owners and players were able to salvage the 2011-12 professional basketball season. With NBA hoops preparing to re-enter the spotlight, I’m free to use basketball analogies in my writing about the market.
Today’s analogy is the universally loved “Head Fake”.
Everyone from the die-hard basketball aficionado to the casual fan knows this move. Watch any NBA game and you’re certain to see at least a few head fakes before it’s over. And when done correctly, the head fake can make even the best defender look foolish.
Market head fakes can be equally embarrassing for investors. But they’re worse than the basketball variety for one specific reason. A market head fake can cost you money.
What exactly is a market head fake?
There are many types of market head fakes. The one you see most often usually goes like this…
The market has a big up day when no one really expects it. The strong upward move then entices investors to move money from the safety of the sidelines into the market. And just as the crowd gets positioned, the early movers sell out and send the market plunging.
Sound familiar?
It should. We’ve seen a number of market head fakes this year. I haven’t kept a close count, but I’d bet we’ve seen more head fakes than average in 2011.
And last Friday’s market rally is the latest one.
The Dow surged over 186 points to close out the week with a 1.4% gain. While not one of the markets biggest one-day gains, it was an important move. If it hadn’t been for Friday’s rally, the market would probably have ended the week with a loss.
So, what put investors into a buying mood on Friday?
It was the agreement reached by EU leaders late Thursday night. They hammered out steps the EU needs to take in order to restore investor confidence in the region.
The agreement lays the foundation for a new “fiscal compact” among the 17 EU nations and up to 9 new members. It gives a new central European authority power to oversee members’ future budgets and impose tighter controls on spending.
Britain is the only EU member that refused to join the new treaty.
The new fiscal compact also provides much needed liquidity for struggling euro nations. A permanent bailout fund will be launched in 2012. And the EU plans to contribute $267 billion to the International Monetary Fund as a separate emergency fund for countries in crisis.
It sounds great… at first.
But here’s the problem.
The new fiscal compact does absolutely nothing to resolve the current budget crises in Greece, Italy, and Spain. And a number of EU countries still face a potential credit rating downgrade from S&P and Moody’s.
In other words, last week’s “historic” agreement does nothing to address the immediate crisis in Europe.
And it hasn’t taken long for the market to react…
European markets started the week off in the red. Britain’s FTSE 100 dropped 0.5% on Monday. Germany’s DAX fell 1.8%. And France’s CAC-40 lost 1.2%.
What’s more, US markets are setting up for decline on Monday as well. As I write, futures on the S&P 500 and the Dow Industrials are down nearly 1% in pre-market trading.
No question about it, Friday’s rally was nothing but the latest in a series of market head fakes. Don’t fall for it. If you do, you could end up looking foolish and a few dollars poorer.
Category: Stocks
