Technicals Ugly, Risk of Domino Bank Collapses

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Dow broke below the psychologically important 7,000 level this morning. This was after the S&P fell below it's November low on Friday. The Russell 2000 and Nasdaq have yet to break their November lows however. The Russell will have to fall to 371 (only 6 points lower than its price as this is written) and the Nasdaq will have to drop to 1295 (55 points below its current price) for this to happen. See if the market can hold when Nasdaq reaches its support level.

Actually the yearly low for the Dow was already given as 6952 on Friday evening instead of the 7033 actually reached on the day. How is this possible? The figures used for the yearly high and lows are for the theoretical Dow - this is the number that would be obtained if you averaged the high or low point of every Dow stock. Since all the Dow stocks don't peak or bottom at the same time during the day, this number is always better or worse than the actual figures. This is not the only quirk of the Dow either. It is also a price weighted average, which means higher priced stocks have a much bigger impact on what happens. Stocks like Citigroup, which fell to 1.40 on Friday, have limited impact on the average even if they drop 50%. This makes it increasingly harder for the Dow to continue to drop once a lot of its stocks are beaten down.

Pessimism ruled the market commentary over the weekend. I found one comment after another about how everyone knows this or that bad thing is going to happen. Well, if everyone knows all about those bad things, then everyone in all likelihood has already sold. When the selling is exhausted, markets have trouble going down (at least in the short term), no matter how bad the news is. This is one reason sudden, explosive rallies take place in bear markets. Too many people get on the short side of the trade. We are perhaps not quite ready for this just yet, but keep a watch out for this phenomenon, especially since there is a tendency for stocks to bottom in the March/April time frame.

More disturbing was media coverage of the banking situation in Europe. Ireland apparently isn't going to fall apart because things there aren't as bad as there were in Iceland. Britain isn't going to fall apart because things there aren't as bad as they were in Iceland. The problem with this line of reasoning is that things don't have to be as bad at they were in Iceland (an extreme example) for things to fall apart. Problems in Eastern Europe (Ukraine, Hungary, the Baltic States, and Romania) and Southern Europe (Greece, Portugal, and Spain) could cause banking collapses that spread throughout Europe and could push even major countries such as Britain over the edge (not to mention Italy). This tsunami of bank failures would then flood into the U.S. financial system.

The next meeting of the New York Investing meetup is this Tuesday at PS 41, 116 West 11th Street at 6:45PM

NEXT: Market Tumbles While Washington Fumbles

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.