After witnessing a 5% decline in the major averages Thanksgiving week, the bulls this week took charge with an amazing 7%+ gain in the four key indicies. For the week, the Dow Jones Industrial Average (chart) posted a breathtaking 7.01% gain, the Nasdaq (chart) surged 7.59%, the S&P 500 (chart) +7.39% and the small-cap benchmark Russell 2000 (chart) advanced an eye-popping 10.34%. Folks this is no typo. Once again stocks are demonstrating enormous week to week and even day to day volatility, and most likely this unprecedented volatility will continue for a while.
So why such a strong upside move and more importantly what is a trader to do with it? First on Wednesday, central banks from around the world made it easier for banks to borrow American dollars. This postponed at least for now the downward spiraling effect the markets were experiencing due to the euro zone crisis. My concern is that this extraordinary action was even necessary, which confirms that the problem across the pond is obviously a lot worse than it seems. Yes it will be helpful to ease borrowing for banks, but it does not hit the debt issues in Europe head on. What is supposed to hit the EU crisis head on is next week’s European summit in Brussels where the euro zone leaders will meet to continue their discussions on how to get closer to resolving their ever growing debt crisis.
Now to the second question of what is a trader do after this unprecedented week of gains? Even though over the past two weeks we saw a 5% decline and then a subsequent 7% gain in the key indices, again what has changed? In my opinion, absolutely nothing! We are still trading in this prolonged trading range of 1100-1275 S&P (chart) and the global risks are still out there, even China’s economic engine is cooling off. We are however seeing some encouraging economic signs here in the U.S. But as long as Europe continues without a clear path of reform, chances are global markets will continue to remain range bound. So what we will continue to look for is long opportunities at the lower end of the range and sell and even consider short opportunities at the upper end of this multi-month trading range.
That said, the day that this trading range breaks and remains in either direction, the long/short thesis will have to be revisited and a new strategy implemented. Please make sure to consult your professional investment advisor before you consider any strategy for we are certainly in unparalleled times. Good luck to all.
Have a great weekend 🙂