Friday, December 9, 2011

Will the European Debt Crisis Stay Off The Front Page Long Enough For A U.S Stock Market Santa Claus Rally?

The U.S. stock market reacted well today (Friday) with yet another +100 point move based on news from  Europe after European Union leaders agreed on a plan to toughen the region's budget rules. The sense of most investors remains intact that somehow a path  to muddle through the European debt crisis will be discovered. Thus, as long as the rating agencies don't play Grinch, there are no banks collapses, and none of the 13 worry events on the Wall Street Journal's road map to the EU crisis start a crescendo of falling domino's, then the U.S. stock market could have a nice rally during the balance of the year.

However, while U.S. economic data has been positive during the past month, there are already some concerning undertones. Companies with exposure to Europe are already starting to reduce their guidance for next year, including Apple, Texas Instruments, Altera, and DuPont. As pointed out by Michael Comeau, "all  this bad news, which is coming just three weeks before the end of the fourth quarter, flies in the face of some of the more positive recent US economic data, which of course, is backward-looking". 

Further "oil is too expensive to support growth and at lower prices supplies will not be sufficient to support meaningful growth." according to Rune Likvern

For those stock market investors and traders that are worried about a European economic collapse and its potential negative impact on the U.S market, determining how to play the balance of this year is challenging. There does seem to be a good likelihood of gains being made by staying long. On the other hand, there is also lots of risk of a big drop in prices from unexpected bad news. My strategy is going to be to start lightening up on positions now, and get completely out of the stock market during the first week of January. Also, for those with an appetite for risk, consider stocks that are good candidates for short selling (including most hardware manufacturers in the technology sector)

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