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All of the major stock indexes in Europe and the United States has been weak ever since Ben Bernanke announced his QE-3 program on September 13, 2012. It seems that the QE-3 announcement by the central bank was a "sell the news" event and stock markets have been in correction mode ever since. The day after the QE-3 program was announced, the S&P 500 Index traded as high as $1474.51 on that session before topping out. This past week, the S&P 500 Index closed at $1379.85 declining by nearly 100.0 points in less than two months.
At this time, many traders and investors can argue that the decline in the S&P 500 index is just a natural and healthy correction from an overbought condition in September 2012. After all, the S&P 500 Index is down by only 7.0 percent at the moment. This correction is certainly not the end of the world, yet. We may have to wait for December before that happens. In any case, there are a few leading stocks that should be followed closely to see if this correction can turn into something more severe. Since this is now a European financial debt crisis the leading European banks must be watched very closely.
UBS AG (NYSE:UBS) is one of the leading European financial institutions in the world. This stock has held up very well as of late. Over the past three trading sessions the stock has pulled back from a 14-month high. Should this stocks begin to fall sharply it would be an indication that the economic conditions have worsened in the near term and this recent decline in the stock market is more than a natural correction. Traders can watch for near term support around the $14.25, $13.47, and $12.55 levels.
Credit Suisse Group Inc and Deutsche Bank AG (NYSE:DB) are two other leading European financial institutions that should be watched closely. Both of these stocks will tell us a lot in the near term when it comes to this current financial crisis. Should these stocks begin to decline sharply it is a sign that the central bankers are losing control of this inflation induced recovery. Some other leading European financial equities that traders may want to follow include the Ishares MSCI Europe Financials Sector Index Fund (NASDAQ:EUFN), and Banco Santander, S.A. (ADR) (NYSE:SAN).
The markets are flushing dramatically today. The Dow, S&P 500 and NASDAQ are all down 2.3% on the day. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is trading at $139.80, -3.13 (-2.19%). The Dow Jones Industrial Average is having its biggest point decline in almost a year. All this coming on the day following the Presidential Elections where President Obama won a second term.
So why are the markets getting crushed? After all, polls favored Obama to win. This is not a huge shock to Wall Street.
So why are the markets getting crushed? After all, polls favored Obama to win. This is not a huge shock to Wall Street.
There are multiple factors here. First, Wall Street is sending a harsh signal to the President. Ultimately, taxing the rich is on the table and likely to happen. In addition, short term capital gains and taxes on dividends are likely to go higher. This is a 'shot across the bow' from Wall Street, flexing their muscle and warning the President.
In addition, there is no longer an election to distract Wall Street from the Fiscal Cliff that lies right in front of America. The President has not been a friend to the Republicans and there is a major fear that no agreement on handling the Fiscal Cliff will be reached. This could cause a major market decline and a recession. Investors are running for cover on this fear.
Next, Europe seemed to be under a secret gag order into the elections. Did you notice how almost nothing emerged from Europe over the last few months? It is not a coincidence that Draghi, the head of the ECB emerged today and gave the world a reality check on how bad Europe is doing.
Lastly, Obama no longer has a need to keep a pretty image. He does not need the stock market to head higher so he can be re elected again. At this stage, less will be done to prop the markets up going forward.
This is going to be a wild time in the markets. There will be major ups and downs and swing traders will profit the most. As usual, long term investors will lose the most. Come join InTheMoneyStocks and get swing trade alerts, proprietary market analysis tools and daily videos/market reports. Learn from the pros to profit in any type of market.
Related: SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), International Business Machines Corp. (NYSE:IBM), Apple Inc. (NASDAQ:AAPL).
Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com
