Markets began the week with a sense of optimism about the potential for strong bank earnings and a continuation of upside in emerging markets such as China. Though bank earnings were on the whole solid, and while there were some bright spots for the bulls in stocks such as Netflix (NFLX), the real news this week was the huge sell-off on Friday.
With about two hours left in the trading session on Friday, the Dow was down 330 points, or about 1.8%, as sellers stepped in big time on a host of concerns hitting the newswires.
A poor quarterly report from Dow component American Express (AXP), along with news overnight that Chinese regulators were cracking down on the use of shadow financing to buy equities, and that they have expanded the supply of shares available for short sellers, combined to send stocks in the U.S., China and other markets plunging.
Then there was news about renewed fears that Greece would default on its loan bailout from the Eurogroup, which could result in a Greek exit from the euro zone and a decided sell-off in stocks in the region.
The action in domestic markets, Chinese markets and European markets reminds us all that when you’re in a bull market, often traders are on edge, ready to press the “sell” button on any potentially unsettling news.
Certainly, the renewed fear of a Greek default and/or Greek exit from the European Union (EU) is a huge worry. Though most analysts think there will be a deal before the early May deadlines, the odds right now of a Greek default are much higher than they were last week.
As for China, most everyone thinks that Chinese policymakers would step up with more stimulus if China’s gross domestic product (GDP) growth rate were to fall below 7%. Yet when talk of restrictions on trading and the permission of short selling make news, it’s also understandable that we’d see selling in that country’s markets.
As for Europe, the Greek issues no doubt are weighing on stocks in the region. However, European equities have done very well this year, and they are way overdue for a profit-taking pullback at current levels.
Friday’s decline in the iShares Europe 350 (IEV) might be the start of that correction, so if you have equity exposure to this red-hot region, it might be a good time to make sure you have your stop-loss orders in place.
Finally, while the market is currently under a blood-red Friday sky, that doesn’t mean stocks are destined to begin a correction. Certainly that could happen. If it did, that correction should be viewed as a welcome reset to the gains we’ve had in many segments.
Only a constant, vigilant monitoring of the charts, the news and the underlying fundamentals of this market will tell us if this is a head fake, or a correction. So, now more than ever, make sure you read the Weekly ETF Report.
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