The Global Bull Holds Its Breath

Greece stumbled out of control as stock markets across the globe plummeted. Debt worries over Greece and other European countries hammered Wall Street. The Nasdaq skidded 7.9% for the week — its biggest loss since an 8.7% tumble in the week ended November 21, 2008. The NYSE composite lost 7.5% — the largest slide since the week ended February 20, 2009. The S&P 500 dropped 6.4% and the Dow slipped 5.7% — to mark their biggest weekly losses since the week ended March 6, 2009. Also last week, the MSCI Emerging Markets Index plunged 9.2%. And, of course, Thursday’s 1,000-plus point sell-off in the Dow — worsened by a market glitch — was one for the history books.  

The good news is that your defensive positions in the Global Bull Market Alert portfolio behaved as advertised. Your short position in the euro through the UltraShort Euro ProShares (EUO) soared 8.6%, after closing at a record high of $23.60 on Thursday. Your defensive position in the CurrencyShares Japanese Yen Trust (FXY) jumped 2.27%, hitting a yearly high of $109.77 on Thursday. "Bad news" is "good news" for these positions.

In an effort to address the crisis in Europe this morning, European Union leaders agreed to provide a huge rescue package of nearly $1 trillion. The deal would provide $560 billion in new loans and $76 billion under an existing lending program. The International Monetary Fund was prepared to give up to $321 billion separately. Officials are hoping that the size of the program — a total of $957 billion — will signal a “shock and awe” commitment that will be viewed in the same vein as the $700-billion package that the U.S. government provided to help its own ailing financial institutions in 2008. The outcome of this is still impossible to gauge. But after such a sharp run-up, I am recommending that you take half of your profits in the UltraShort Euro ProShares (EUO). But hold on to the rest for now, as we await the market’s reaction to the plan.

As befits a genuine market crash, there was nowhere to hide among your stock positions. You were stopped out of Mechel (MTL), China North East Petroleum Holdings Ltd (NEP), Millicom International (MICC), MercadoLibre (MELI) and Cognizant Technology Solutions Corp. (CTSH) at losses. So, what is our current state of play? Most markets are at crucial levels. They could bounce sharply, as they did in the post-February sell-off. Or they could slice through the January lows, which is roughly where they are now.

I continue to believe that with the global economy recovering, the recent sell-off is more about market sentiment and Mr. Market’s mood swings. At times like this, investors throw the baby out with the bathwater. And how much markets bounce is often a mirror image of the severity of the sell-off. So, it would not be surprising to see stocks bounce sharply from current levels. After all, the fundamentals of your Global Bull Market Alert picks are still in place. Earnings by MercadoLibre (MELI) — the “eBay of Latin America” — were better than expected, and the stock was one of a handful that actually rose on Friday.

So, what is our strategy moving ahead? The impact of financial contagion from Greece is impossible to measure. As a result, defense is No. 1 now. If markets bounce, we will gradually re-enter the market. But if markets continue their downward trend, your current positions in UltraShort Euro ProShares (EUO) and CurrencyShares Japanese Yen Trust (FXY) will serve you well. And, thanks to a bevy of exchange-traded funds (ETFs) that bet against the market, there are other ways to profit from a falling market. One example is ProShares Short MSCI Emerging Markets (EUM). But until the direction of the market becomes clear, it is best to hold off on any new recommendations for now.

Portfolio Update

UltraShort Euro ProShares (EUO) hit a record high of $23.60, before ending the week 8.6% higher. Sell half of your position here to lock in your profits. With some hedge funds betting on the euro’s parity with the U.S. dollar, hold on to the rest of your position. Your bet against the European currency is now a HOLD. Tighten your stop to $21.00.

CurrencyShares Japanese Yen Trust (FXY) jumped this past week to an intra-day high of $112.62 during Thursday’s market sell-off. This continues to be the place global investors go when risk appetite soars. FXY remains a defensive BUY.

P.S. Please join me Wednesday, May 12, 2010 at the MoneyShow in Las Vegas for a subscribers-only meeting. This exclusive event will take place from 10:00 a.m. to 11:00 a.m. in the Calabria room at Caesar’s Palace. To RSVP for this event, please click on this link, and supply the requested information. This private meeting will be open only to paid subscribers of Global Stock Investor and Global Bull Market Alert. See you there.

P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.