So what does all this mean for global stock markets moving ahead?
Sentiment is extremely negative. Even before the downgrade, the IBD/TIPP Economic Optimism Index plunged 13.5% to 35.8 — the lowest since the poll began in 2001. It took out even the low of 37.4 set during the summer of 2008, when the financial crisis exploded into the nation’s headlines. And these readings don’t even measure the impact of this weekend’s S&P 500 downgrade.
On the one hand, I am tempted to recommend a bet against the S&P 500 like the ProShares Short S&P 500 (SH) or the Ultrashort S&P 500 ProShares (SDS), which was up 15.13% last week.
On the other hand, I also know that during times of extreme pessimism like this, the market tends to bounce short term. That’s why I’m reluctant to recommend a position that could go against you so sharply on any (overdue) bounce this coming week.
On the positive side, the historical precedent for the year ahead is not that bad for the stock market, after a downgrade like the one that the United States just suffered. When Canada lost its AAA rating in April 1993, its stocks gained more than 15% in the next year. The Tokyo stock market climbed more than 25% in the 12 months after Moody’s downgraded Japan in November 1998. With so much uncertainty on Monday’s open, this is the time to step back from the plate. If we have a short-term bounce, it will be well-deserved. But for now, hold on tight and — as always — stick to your stops.
Portfolio Update
Alliance Resource Partners L.P. (ARLP) dropped 8.19% this past week. ARLP recently reported positive earnings and announced a 3.7% boost in its dividend. The company also announced committed coal sales booked well into 2014. In addition, Wells Fargo recently upgraded ARLP. ARLP is currently a HOLD.
Bank of Ireland (IRE) fell 14.58% last week. IRE took a breather this week after two straight weeks of gains. Having already attracted high-profile private equity investors, IRE likely will continue its rise once markets stabilize. Bank of Ireland will report earnings on Aug. 11. IRE ended the week just above its 50-day moving average and remains a BUY.
National Bank of Greece SA (NBG) lost 9.92% over the past five days. NBG’s trading price has ranged like clockwork for nearly three months, bouncing between $1.20 and $1.50. NBG broke below $1.20 two days ago, right along with the global meltdown. I expect this position to swiftly regain its “rolling” posture as soon as the overall market stabilizes. NBG is a HOLD.
