Dangerous Curves Ahead

06/28/2010 2:33 pm EST

Focus: MARKETS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of Cash Machine, warns against unwarranted complacency.

The pattern for the equity markets was pretty simple during the month of May—euro down, global stock markets down—ending in the worst-performing May since 1962. Since the beginning of June, the euro has caught a fresh bid at 1.20-to-1.00 against the US dollar, which in turn has ignited the recent spate of buyer interest in equities around the globe.

Whether this is true support for the euro or simply an oversold bounce has yet to be determined, but it seems that currency traders are happy holding that level until more is known about the depth of the fiscal crisis in the euro zone. The latest bond auctions in Spain, Portugal, and Italy fared OK in terms of demand and pricing. A little bit of good news goes a long way following the dismal May.

My contention with the present investment landscape is that I'm not convinced the euro zone has been fixed to the point that the "all-clear" signal to leverage back up into the stock market is warranted. We saw major institutions around the globe aggressively de-leverage up to and right after the flash crash of May 6. Maybe I'm missing something, but big pools of capital tend to shy away from short-term trading, instead opting for dollar cost averaging into those themes that they believe have long-term upside.

So for big money to spend a month lightening up on massive positions and then just turn on a dime and get giddy on stocks again doesn't seem logical. Most global fund managers would sell option premium, set tight sell stops and use ETFs to hedge their portfolios. But to see hundreds of billions of dollars in invested capital leave the market altogether tells me that there is genuine caution at the institutional level that deserves our attention.

Most of you are aware of my optimistic bias. I generally look for the good things in people, life situations, and investments. Having a positive mental attitude is healthy and constructive, but wearing rose-colored glasses can be dangerous to your health and your portfolio, and the business media is loath to bring us the bad news on a timely basis because it's bad for ratings.

Downplaying the seriousness of the threat of contagion spreading within the European banking system, the surge in new foreclosures, the lack of private sector growth, the recent downturn in the savings rate, and the probable/eventual military strike on Iranian nuclear facilities is fully intentional by CNBC, Bloomberg, and Fox. The networks have mastered filtering the headlines to keep the mood upbeat, but I think a good dose of what is being reported by the networks has the look and feel of rose-colored glasses.

I'm grateful that the market has recovered from the revenge of the machines that caused the flash crash. However, I'm raising a yellow flag for the next couple of months.

Think of it as driving along the road and a "road work ahead" sign appears. It doesn't mean pull over and get out of the car. It means slow down, be careful, and watch for debris in the highway. That's how I see the market shaping up for the balance of summer.

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