What Will Stop the Carnage?
06/30/2010 3:58 pm EST
The long Fourth of July weekend will help. No one wants to be exposed either long or short over a four-day market holiday. I expect to see squaring of positions and declining volumes over the next two days as US traders get ready for the weekend.
An oversold bounce is likely next week. The Standard & Poor’s 500 has dropped almost 200 points—or 18%—from the April 23 high at 1217 to today’s close at 1031. That’s a lot of plummeting in a very short period. That’s usually good for a bounce or two.
The new round of earnings season begins on July 12. Earnings from individual companies could take some of the attention away from disheartening macroeconomic news. If worries about macroeconomic growth is what’s driving stocks lower, then a decent earnings report or two would help to convince at least some investors that not every company is headed into the dumpster.
European bank stress test results are due in around July 16. If most of the euro zone banks pass the test, it will relieve the pressure on the entire sector. The problem right now is that everybody is worried about every bank. (For some good news on “Stress Test Lite,” see this post.)
The successful IPO of the Agricultural Bank of China and the follow-on stock offering from Banco do Brasil, the biggest bank by assets in Latin America, within the next two weeks would demonstrate that banks—well, some banks—can raise money in the capital markets.
Unfortunately, I don’t think these events add up to enough to turn the trend upward for more than a few weeks. Looking out further, I think this downturn—certainly now a correction and heading for worse—has further to run over the next two to three months.
It’s going to take real evidence that economic growth isn’t collapsing in developed economies and seriously slowing in the developing world to turn the trend around.
Full disclosure: I don’t own shares of any company mentioned in this post.