THE DRAGON’S BREATH & OTHER CAUSES

February 28, 2007
By seadmin

When the Chinese sneeze, the world catches a cold.

That’s a great metaphor for what happened yesterday, as a near 9% sneeze in the Chinese stock market precipitated the huge sell-off we saw here in the United States. Weakness in China also did a number on markets throughout Asia.

Shares in Tokyo, Hong Kong, Singapore, Malaysia, Australia, New Zealand, the Philippines and Indonesia all saw big declines following China’s meltdown. This should serve as proof that when the Dragon breathes fire, the rest of Asia — and indeed the rest of the world — gets burned.

One other factor that contributed to the sell-off yesterday was the growing fear that a breakdown in the sub-prime lending area will cause a weakening in the housing market and a tightening of credit. This is bad news for the housing sector and it is bad news for the equity markets.

Another factor in yesterday’s widespread selling was news that economic growth is slowing. The GDP number was revised downward to 2.3% in the fourth quarter, another negative for stocks. We also saw an unfavorable durable goods number. That indicator suggests that the economy is starting to really slow down, as well. Put all of these factors together in one trading session, then mix them with an extremely overbought market that hasn’t seen a correction since last July and you get what we got Tuesday.

The best advice I can offer right now is to start taking some risk off the table; that is, if you haven’t done so already. Now is not the time to be 100% invested in these markets.

If you want my complete update on exactly where you should be investing your serious money right now, I invite you to become a Successful Investing subscriber.

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