Are We Near A Market Bottom Or Another Crash?

Includes: DIA, GLD, QQQ, SLV, SPY
by: David Urban

The market rally that started on Tuesday afternoon caught a number of participants by surprise. The rally carried through the close of business Thursday, helping to lift the overall market.

Unfortunately, the news out of Europe is not bullish enough to support such a strong rally.

This article signals severe and significant problems within the EU banking sector. If the EU is offering unlimited amounts of money through 2013 to prop up the banking sector and ordering a new round of stress tests on the banking sector, what does that say about the health of the entire sector?

Compounding the problems are worries emanating from Greece over its latest budget where 30,000 government workers are scheduled to lose their jobs. The only problem with this number is that it is illegal to fire government workers so they will be transferred to an area where they get paid 60% of their regular salary.

Meanwhile, the banking sector drags its heels on going after tax cheats.

Oh, and the Greek courts said that long-term unemployed can discharge their loans without recourse. I have not found a valid source for this, but open the above link in Chrome and translate to English.

In a sign that the Greeks will not win this stare down, the EU postponed Greece’s request for additional loans.

In Great Britain, The Bank of England decided to boost their Quantitative Easing program by 75 billion pounds.

The Occupy Wall Street movement continues to gain strength, spreading to numerous US and Canadian cities. No longer can the movement be ignored by the press.

I am not going to knock the people supporting the movement similar to not knocking the Tea Party movement. From a macro perspective, both movements have legitimate demands.

Simply put, the Tea Party realizes that the exercise in massive government spending has been a failure and wants a significant restructuring.

The Occupy Wall Street movement is rallying against a system that it sees as leaving a significant amount of Americans behind.

It is not my place to start a political back and forth and I do want to do so here. What I do want to say is that both movements are tapping into a significant portion of the US population that is disaffected with both political parties and a process that it sees as flawed.

Looking at the last unemployment report; the U-6 number, which quantifies the amount of unemployed and underemployed in the US, remains stubbornly high at 16%. That means that roughly one out of every six people in this country is either unemployed or underemployed.

For me, it increases tail risk significantly in the US and global markets and that is all I will say now.

The recent rally may have some more strength to move higher as we enter into earnings season, but one should be aware of the tail risks continuing to emanate from the US and Europe.

Without significant structural changes to the Greek economy, the threat of default will continue to remain an overhang in both the bond and equity markets leaving the upside limited.

Investors looking to go long the S&P500 (NYSEARCA:SPY), DJIA (NYSEARCA:DIA), or NASDAQ (NASDAQ:QQQ) should hold off until we break out of the recent trading range, meaning the September highs rather than the 50 moving averages.

Technically, investors might want to consider Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV) as a hedge against tail risk in the coming months.

Silver is especially interesting on a technical basis. The last time the RSI got this oversold was in October of 2008 and January 2010 preceding major moves in both cases.

Disclosure: I am long DGP, AGQ.