Once Again, Markets Rally on Government Rescue

Includes: DIA, QQQ, SPY
by: Sean Hannon

Publishing my weekly newsletter on Sunday should offer some clear advantages. Normally, the weekend provides time for both inspection and preparation. Allowing the markets to settle, we can examine the week that was, analyze key events scheduled to occur over coming days, and create a strategy independent of the market's noise. Now is not a normal time.

Following a brutal week in which the Dow Jones Industrial Average (Dow) fell 5.7%, investors are shell-shocked. Sadly, the Dow was one of the better performers. Six months ago, I created the EPIC Index as a broad measure of stock market performance. With weightings in both Europe and emerging markets, EPIC fell 8.1% on the week and is now 5.7% lower on the year. Last week's pain was widespread and dramatic.

After the past four trading days, it would be nice if we could slowly exhale and plan for the upcoming trading week, but no respite exists. With the European Union (EU) holding emergency meetings to address the growing concerns about Greece's debt, there is a race to do something before Asian markets open. Uncertainty over what will, or will not, occur makes setting a weekly strategy difficult.

With the goalposts continually shifting, we will need to be flexible over coming days.

Frustrated that our typical process is disrupted, the emergency weekend meeting has more ominous signs. Looking back over the past week, we saw extremely volatile trading, huge plunges and rallies, stories about how previously contained debt issues are becoming much more serious, and a weekend session where policy makers are asked to do something in order to stop the chaos. Is this September 2008 redux?

Investors may shudder at the thought, but vigilance is needed. Overall, the economic and earnings numbers have been good. This growth should be driving stock prices higher, but instead each piece of positive news has led to further declines. Until buyers stabilize the market, fear will feed upon itself with lower prices triggering a continual rush for the exit.

For now, the EU's massive intervention has sent global stock markets skyward. Now we must watch to see how sustainable the move is. I am skeptical that using debt to quell a crisis sparked by too much debt is the long-term answer, but each time policymakers act markets rally. Eventually this pattern will cease, but until then, use the rally to recoup losses and reposition.