Markets: More Impetus For A Summer Correction (SH, RWM, TZA, PSQ, SDS, SPXU)
Sy Harding: Another week of economic reports adds to the likelihood of a summer correction in the stock market again this year, and even to the possibility that it has already begun.
After four or five months of surprisingly strong economic reports that fueled the rally off the October low, it looks like the U.S. economic recovery has reached another slippery slope that has it sliding backward again.
Two weeks ago it was negative surprises from the important housing industry, signifying it has not reached a bottom yet after all, and that the Chicago Fed National Activity Index, designed to gauge economic activity nationally, fell back into negative territory for the first time in four months.
Last week it was the shock of the dismal employment report for March, indicating the previous several months of jobs improvement were temporary.
This week it was the surprising jump of 20,000 new weekly unemployment claims, indicating the jobs reversal in March is continuing in April. There was also the first decline in the NFIB Small Business Optimism Index in five months. And the University of Michigan Consumer Confidence Index declined in April versus the consensus forecast of economists for further improvement in April.
The reports of recent weeks have cooled off global hopes that the U.S. economic recovery would continue to strengthen and provide support for faltering global economies, rather than have the faltering global economies drag the U.S. down with them.
The U.S. economic recovery also stumbled in each of the last two summers, but that was not the only catalyst for the U.S. stock market corrections in those two years. The euro-zone debt crisis was as big a concern.
Unfortunately, the euro-zone debt crisis, which seemed to have been resolved a few months ago by the bailout of Greece and massive infusions of extra liquidity into eurozone financial systems, has returned. And this time the focus is on Spain, a much larger and more difficult economy to bail out than Greece should it come to that. It was reported Friday that Spain’s banks had to borrow $416.7 billion from the ECB liquidity fund in March compared to $223.8 billion in February. Borrowing by all banks in the 17-nation euro-zone in March totaled $1.48 trillion, and Spain accounted for 28% of it.
European stock markets have been responding to the new debt crisis concerns (as well as their slowing economies) since early March, with markets in Germany, France and the United Kingdom already down an average of 8% since the end of February.
Meanwhile, concerns that China’s economy, the 2nd largest in the world, might be slowing to a hard landing were heightened by Friday’s report that China’s economy grew by 8.1% in the 1st quarter, down from 8.9% in the 4th quarter of last year, and below the forecasts of 8.3%.
Chinese Premier Wen Jiabao had projected China’s growth will slow to 7.5% this year, but a growing number of analysts believe it will overshoot on the downside into a hard landing, a concern enhanced by Friday’s report.
Meanwhile, Brazil’s government projects its growth rate, running at 7.5% in 2010, will be cut in half to just 3.8% this year.
So, it was another week of disappointing reports from all directions.
My Seasonal Timing Strategy remains in its favorable season and 100%, for the moment anyway. And my non-seasonal Market-Timing Strategy has come off its October buy signal, but only to neutral, not yet on a sell signal.
However, I suspect the next opportunities for profits may well come from the downside, in short sales and positions in inverse ETF’s designed to move up when markets move down.
On any sell signal, some of my favorites from the last two summer corrections will likely be my favorites again. They include the ProShares Short S&P 500 (NYSEARCA:SH), the ProShares Short Russell 2000 (NYSEARCA:RWM), and ProShares Short QQQQ (the Nasdaq 100) (NYSEARCA:PSQ).
I suggest, in preparation for the possibility of a correction, that investors familiarize themselves with the various methods of positioning for profits from the downside. The market usually goes down much faster than it goes up, making it more difficult for those who are not prepared. The market again demonstrated its tendency to go down faster than it goes up by recently losing more than two months of gains in just five days in response to unexpected negative economic reports.
Related: Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA), ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS), ProShares UltraPro Short S&P 500 (NYSEARCA:SPXU).
Sy Harding is editor of the Street Smart Report, and the free market blog, www.streetsmartpost.com. The Street Smart Report Online includes research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s. It provides two model portfolios as guides. One is based on our Seasonal Timing Strategy, one on our Market-Timing Strategy.