What’s Happening in the Global Markets

The Smart Profits Report: Traders’ Tuesday: Issue #320
Tuesday, June 20, 2006

What’s Happening in the Global Markets: The Global “Ripple’s” Headed Our Way
By D.R. Barton, Jr.
Advisory Panelist, Mt. Vernon Research

My first and last roommates in college had one common characteristic - neither had ever wandered very far from their respective hometowns until they went off to university. They were great guys. Both were good, respectful roommates. But I must say that in a broad sense, they lacked perspective. All of their views had been formed by local events. They were sketchy on issues of national importance. And their knowledge of anything on the international scene was nonexistent.

This may sound like a naïve way to go through life. But I know many traders and investors who take the same approach. If something happens outside the U.S. markets, they don’t know a thing about it. And right now, BIG THINGS are happening outside the U.S. markets. Of course, you wouldn’t know it by watching business TV in the U.S. Even the traditionally reliable Wall Street Journal has provided only spotty coverage of the devastating moves that have struck foreign markets.

When such big swings are happening throughout the global markets, they will eventually have ramifications for us here at home. Let’s take a look at why this happens and what we can do in our trading and investing to protect ourselves and take advantage of global trends.

Don’t Believe the Perma-Bulls; All’s Not Rosy In The Global Markets

Last Thursday (June 15), we had one of the strongest days of the year. The TV analysts were giddy - some declaring that “the bottom of the market was in.” This may be true for the short run. But during the summer doldrums, we are almost sure to see lower stock market prices.

There’s a simple reason for this: the global markets have really been rocked in the recent decline. And while it’s easy to shrug this off and say that the U.S. economy is just stronger than the rest of the world’s economies, that would be a mistake.

The global economy is intertwined, and prudent traders everywhere are keeping a close eye on what’s happening elsewhere.

The bottom line is that huge drops in global markets will have a ripple effect in global consumption - especially on discretionary spending. And this will have an adverse effect on the U.S. markets that we haven’t felt yet.

Before we discuss what you can do in your trading and investing, let’s look at what has happened in the global markets. These numbers are current through June 8:

Global Markets numbers thru June 8, 2006

As you can see, the U.S. market suffered much less during the current pullback. (The S&P 500 Index did trade down further after I made this chart, but has not gone lower than 8% off its highs).

I don’t expect the U.S. markets to drop 50% like those in the Middle East. But I do expect further declines this summer, if for no other reason than lowered consumer spending worldwide (as well as in the U.S.)

What You Can Do To Prepare For Summer

There are several things that every trader and investor can do to prepare themselves for the summer months:

Long-Term Investors: Keep your head out of the sand! Don’t be like the TV pundits who think higher market prices are a birthright. The markets will move up and then they will move down. Then this pattern will repeat. Make sure that you have an exit strategy for each of your positions. Then you can protect yourself should this sell-off become more severe. Be patient and watch for signs of a global market turnaround; after prices strengthen for a week or two (or three), some serious values will be available globally.

Intermediate and Swing Traders: Beware the current volatility. Wider stops and smaller positions are prudent until the volatility pattern becomes more defined. Remember that the market has two sides - there will be long and short opportunities for us.

Short-Term Traders: Enjoy the volatility! Enjoy the rapid direction changes and two-sided market. This is the market short-term traders wait for all year.

All Traders and Investors: Seriously consider widening your scope of research and trading. Active traders can look at the German DAX futures contract (traded on the Eurex exchange), which is popular among intra-day traders. Investors can consider adding country-oriented Exchange Traded Funds (ETFs).

Good Trading,

D.R. Barton

Today’s Smart Profits Cribsheet

My good friend Horacio Márquez, Advisory Panelist for The Oxford Club, follows the global markets like few analysts. His trading service, the Money Map Advantage, has made some great calls in global markets and gotten investors involved in easy-to-implement and profitable ideas outside the U.S. Learn more.

To learn more about our newest addition to The Smart Profits Report, check out D.R. Barton’s bio.

The Chart of the Week

SINX Daily (US) S&P 500 Index

While the market has firmed up a bit off of last Wednesday’s low, traditional momentum indicators are not yet giving us anything to sing about… Our analysis says that the bottom is not yet in for the summer.

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