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INM Jul 2011 - Market Bothered by Budget Blowout
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
The US government's current budget blowout continues spewing an unbelievably huge amount of ugly toxic debt directly upon all Americans. All of America suffered to some extent because of the BP oil well blowout. However, BP capped its oil well blowout in the Gulf of Mexico after 87 days, which at least limited the extent of its toxic damage. They capped the well, and they also did what seems to be a decent job of cleaning up the mess and making things right for those who were directly harmed. Now years into the recovery from what was described as nearly a "systemic failure" by some, the sickening feeling of uncertainty over the government's budget blowout continues on.
Only adding to what the Fed Chairman, Ben Bernanke, previously referred to as an "unusually uncertain" outlook, we are witnessing the greatest-ever showdown over raising the nation's debt ceiling. Perhaps we may not see the uncertainty start to ease until new Speaker of the House, John Boehner, finally tells us that policy-makers have agreed on a real serious solution. The debt ceiling has been raised 10 times since 2001, and the current limit was officially reached on May 16th.
Not that ratings services have a great reputation by any means, but it bears mentioning that they have recently started to make warnings about US debt ratings' outlook being negative. These warnings also seem to have coincided with a decline in the markets which obviously reflects that confidence has been waning (I found this third-party video on the subject interesting http://www.youtube.com/watch?v=8nI7XRbXcgY )
As always, the technical action we see is far more important to follow than the talking heads on television. The market had managed to shake off negative headlines, and it had even been rallying in the face of bad economic news, high unemployment, and looming debt concerns. But the market hates uncertainty. The uncoordinated and reckless behavior of those setting fiscal policy appears to be the primary catalyst undermining the financial markets now.
More recent breakouts have frequently failed, which, coupled with numerous leaders breaking down, is all the more reason for investors to be reducing market exposure. After buying high-ranked leaders at the proper buy points, investors must always have the discipline to limit losses at 7-8% if a stock you buy ever falls that far from your purchase price. This is the only way to avoid risking even greater losses.
Preserving your capital and your confidence is important. Skeptical investors could easily be surprised by another substantial and sustained rally higher for the stock market. Watch for a robust follow-through day as confirmation that institutional investors have yet again shifted their bias toward accumulating stocks. Meanwhile, individuals are not likely to be tempted by great Money Market and CD rates, and many corporations are still hoarding cash. An active merger and acquisition environment has also helped thin the field of available candidates. So, a tremendous amount of sidelined cash is still ready and waiting to find a direction to start rushing into this market again.
The fact-based system of investing we embrace only allows us to take action on stocks matching up favorably with winning models of the past - high-ranked leaders with the all key fundamental and technical characteristics. Recent leadership has been coming from companies in groups including: Health Services, Electronics, Retail, Consumer Non-durables, Food and Beverage, Chemicals, Computer Software & Services, and Manufacturing.
The biggest area of concern in recent months has been financial stocks, a long respected "leading indicator" for the broader market. Financials have been repeatedly noted as a worrisome area of weakness. Both the Bank Index and Broker/Dealer Index rallied above their respective 200-day moving average (DMA) lines as May drew to a close. Any brief glimmer of hope, however, was quickly destroyed when their descent continued and more damaging losses soon led to violations of their prior chart lows. The major averages have a greater likelihood of suffering deeper losses when financial shares are weak. When the financial groups show signs they are finally on the mend, they can provide a very important underpinning for a new rally.
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net :
Kenneth J. Gruneisen has successfully completed the CAN SLIM® Certification Program. Mr. Gruneisen became a Registered Representative in 1987 and his career includes experience offering personalized assistance to investors with more than a decade of experience as a Registered Principal managing a branch office.
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