Well what a week it has been, I take 1 week of vacation and the market, in fact the global economy starts to get the jitters.  The fact is these moves have been telegraphed for some time now.  My last 3 market updates have warned of the down-turn with progressively stronger warnings, starting March the 30th through to today.

The market is showing signs of seriously increasing fear.  We can see this in the volatility of the market moves, more than half of the days recently have seen a greater than 1% move either up or down.  Many of them down.

On May 25th the UK FTSE 100 closed below 5000 for the first time since October and the following day the Dow Jones Industrials closed below 10,000, both significant psychological levels.  The MCSI World Index is also down 10% since the start of the year.

But why the panic!

The are a number of key contributing factors.

• Europe is in trouble, faced with a lower the rest of the world growth rate and a huge ball and chain around its ankle known as the PIGS (Portugal, Ireland, Greece and Spain).  Europe needs to show it will fix it’s Fiscal problems.  However fixing these problems will reduce demand in the countries, which may counter-act any remaining gains from the stimulus packages enacted last year.
• The USA shows no clear plan for reducing its huge deficit, the leadership is still discussing stimulus packages.
• China it beginning to attempt to prick some of the huge bubbles that are occurring in its own economy, with little success so far.  Bursting bubbles is never easy or painless.
• The governments of the Rich World once the heroes for averting the complete financial meltdown in 2009, are now becoming “THE PROBLEM”.  Holding too much debt and still keeping the cost of money extremely low may have some stark ramifications in the future.
• The LIBOR (London Interbank Offer Rate) the rate at which banks lend to each other, is starting to inch higher, although still way below the crisis levels of 2009.
• The Markets are still a little pricey.  Look at the S&P Composite Index P/E Ratio, still above 20 and rising.

The Good News!

There are some positives out their which we should bear in mind before we start to fear the worst.

• World output / growth is still expected to rise by about 5% this year.
• Europe has now at least woken up to the challenge ahead, with austerity measures already enacted in Spain, Greece, UK and Ireland.
• The drop in the worth of the EURO is of great benefit to European businesses, especially those economies heavily reliant on exports.  Germany is still challenging China to regain the number 1 spot as the world biggest exporter (by value) and the drop in the value of the Euro will only increase its competitiveness and bring in extra revenue.
• American consumers have returned to the shops, and in fact despite huge numbers of job losses the US still shows the rest of the world the way in terms of innovation and determination to succeed.

So what should we do?

Sit tight and watch the market action.  Many people say that if you are not long on the market you should be short.  But there are times when you should be neither.  This could well be one of those times.  Look at the charts below of the SP-500, DJ-30, Russell 3000 and the advance decline line.

• All are synchronized
• All the indices have retraced below the first Fibonacci level of 61.8 since the March 2009 low.
• They may be finding support at current levels.
• All have declined on increasing volume which we know to be very bearish
• Normally stocks rise before a US public holiday, but not this time.

So which way will the market go?

There are no clear signs either way, so be careful where you put your money.  Wait for the ideal buying opportunity.