Making Money Alert: Rebounding off Bad News

The action in the financial markets over the past week and a half has been tumultuous to say the least. Last week (between Monday’s open bell and Friday’s closing bell), the major market indices — the Dow, S&P 500 and NASDAQ Composite — all sank more than 2%, with the selling really heating up after the Boston Marathon bombings.

Small cap stocks got hit even harder, as they were slammed with a 3%-plus loss. The real losing sector, however, was precious metals. Gold and silver plunged 12% last week, as measured by the $XAU Gold & Silver Index. Though we’ve seen a nice rebound in XAU during the past couple of days, the sector still is reeling from a lot of selling.

Meanwhile, despite the pullback last week in domestic equities, the past few trading sessions have seen a nice rebound off of last week’s early sell-off. The chart here of the S&P 500 Index shows the recent bounce in the broad-based measure of large-cap stocks.

As you can see, this bounce occurred right at the 50-day moving average, a region where there was some solid technical support. The question now, however, is how long will this rebound hold? Will we see more new all-time highs, or was last week’s volatile trade a precursor of more selling ahead?

The next week or so should answer that question for us. But in the meantime, the market continues to receive less-than-bullish economic data. For example, today’s durable goods report was dismal. The March data showed that orders for long-lasting U.S. manufactured goods recorded their biggest drop in seven months, falling 5.7% as demand for items such as appliances and aircraft fell nearly across the board. The more troubling thing here is that just last month, durable goods orders rose 4.3%.

On the earnings front, the results so far have been mixed. Some companies continue to do well, but others, particularly those who have exposure to Europe’s weak consumer demand, are really feeling the headwinds of that region’s recession. The weakness in Europe, combined with a slowdown in the rate of growth in China, is one big reason why global growth forecasts from the International Monetary Fund (IMF) were lowered recently.

Moreover, the global growth picture is having a dampening effect on commodity prices, and hence the slide in not only gold, but in commodities of all stripes, including the ones here in the DB Commodities Tracking Index (DBC).

The chart above of DBC clearly shows the rough times in the commodity space, and this situation is a clear confirmation that global growth is sputtering. If this struggle continues, it’s going to have a negative impact on corporate bottom lines — and that’s not good for stocks here at home, or virtually anywhere else.

Caged Wisdom

“Ideas are one thing and what happens is another.”

–John Cage

This quote from the composer, writer and artist definitely applies to the financial markets, especially during the past several years. We all have ideas about what is likely to happen in stocks, bonds and commodities, but most often, the reality of what takes place is far different. Keep this reality check in mind whenever you put your money at risk.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

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