“The crisis has reached a systemic dimension”
That was what European Central Bank President Jean-Claude Trichet said in the middle of the week. If Euro crisis that shaken the global economy since May 2010 has hit the bottom, that remark will definitely confirm it. That comment came days after global markets hit this year low so far.
On what basis can that statement indicates the bottom ? From a rationale view, finally, EU has realized the seriousness of the debt issue has on global economy and by doing so, they have no choice but to come out measures to tackle it and no more sweet talking out of the crisis anymore ( that is Talk Only, No Action). Well for sure will not have a one-fix-all solution but rather couple of measures to slowly improve the situation. EU leaders also planing measures to recapitalize banks for the worst case of Greece default. EU has the summit meeting on 23rd Oct to trash out plans, provides detail on the plans to resolve the crisis. Issue of Euro bonds, enlarge the EU rescue funds, increase private investors haircut on Greek default are some of the measures in their minds. The first victim ( like in the case of 2008 crisis, Lehman Brothers was the victim ) for the EU crisis was Dexia bank.
Are we really out of the wood yet ? Answer is NO but that doesn't mean still have more downside to the stock markets either. Unless US goes into recession if not the downside will probably be limited for now.
Putting aside EU crisis, in the US side, economic data again has not shown any sign of recession but one fact remains is the high unemployment rate. Any stimulus from US Fed should not and will not be appropriate to bring down the unemployment rate. What US needs is a jobs plan to create jobs like what President Obama proposed. Prolong period of failing to create jobs will eventually sink the US economy back to recession without any doubt.
If the EU crisis shows sign of improvement within the next few months after implementing measures for it, focus will soon shift back to US on its recovery in particular the high unemployment rate. For that issue, need to wait for Obama's jobs plan to pass as bill in the Congress.
Markets have rebound sharply of at least 8% from last week low, most still believe just a relief rally or dead cat bounce. In particular those TA looking at charts ( well most still in downtrend for sure ) insisting so, hence going on short position on any rally but were later squeezed out when the markets went up further. Something one must note of. Chart is based on past data to predict or project what will happen next. The lagging indicators will take time to adjust or capture or reverse the current trend. By then when charts show downtrend negated, markets probably already rebound at least 20% from the bottom. Hence, the risk is high if the market does a sharp rebound like the case of March 2009. Advise is look at situational events ( those are much more powerful indicators of what will happen next than chart indicators ) before committing any moves.
Now here is the most interesting part, should I be buying now that market has rebounded and probably already hit the bottom last week already ? Well no absolute answer to that as it depends on individual's risk level. For those with higher risk tolerance, if you believe it is already bottom, buying on dips strategy could be adopted. For those risk adverse investors, best case is wait 3 to 6 months later for clearer picture ( confirmation from economic data ).
Lastly, a food for thoughts :-
"It takes a drop of 20% to realize it is a bear market BUT it will take a missing of 40% profit chance to conclude the worst is over for the market"
