Prague Twin

Saturday, May 27, 2006

Weekly Economic Report

This was the most interesting week of trading in quite some time.

After last week's jitters and fears of a precipitous drop, the markets continued to slide into negative territory, with the Dow hitting a point below 11,000 on Wednesday. But Thursday and Friday, the global markets rallied, and there was a very strong upward move at the end of European trading, triggered by the postivie U.S. open on Friday. Roughly half of the losses that occured in the 10 worst days of trading in several years were erased Thursday and Friday. The Nasdaq is back into positive territory for the year. However, the Dow is still off 4% from it's highs just 2 weeks ago, and many of the global markets are 5 to 6% off their recent highs. The Nikkei index, however is shooting up fast, gaining almost 3% on Friday.

Where do we go from here? That is anyone's guess. One thing for certain, the whole dynamic of trading has sudenly changed from stable growth to high volatility. If you look at this six month chart you can see that the pattern has changed and volatility has increased. This is great for traders, but not good for long term investors. There is a lot of risk in the market, and this will probably continue for some time.

Last week I predicted that the EUR/USD rate would stay between $1.26 and $1.30 for quite a while. I also pointed out that $1.2690 looked to be providing support. Well, the range is even tighter with the pair staying confined between just under $1.27 and $1.29. However, the volatility was evident as the pair bounced between this range with fantastic speed. This is a range trader's paradise for now.

Very good economic data came out of the U.S. this week including strong home sales (surprised me) and Q1 GDP (5.3%). Housing data was better than expected, but not exactly great. Q1 GDP was less than expected, but still a very strong number. These numbers, however, were unable to lift the dollar, which means that further weakness in the dollar is expected. I don't think we are going to see the $1.2690 support broken (it bounced off it that support no less that 3 times this week). Instead, if the Euro can break $1.29, and carry through $1.30, we could see $1.35 or even $1.40. Right now the Euro stands at $1.2730. Not a bad time to set a stop loss just below the $1.2690 level and let it ride.

One thing that is freely admitted even by the MSNBC cheerleaders is that "we see a migration of capital into foreign markets." Cited as a cause is the extra layer of bureaucracy that has been added as a result of the Enron scandal. Another factor is the fear that many investors have that the U.S. market is overvalued: How many more Enron type stories are out there just waiting to break? No one knows. Finally, the dollar weakness of late, and its expected further weakness makes foreign investmenst more attractive.

In summary, there is a chance that we will see significant gains next week coming out of this impressive bounce off of the test of 11,000 in the dow. We could easily see new record highs in the comming weeks, so all you bargin hunters out there that bought in on the last dip have a good chance to make some serious cash. But investors beware: there is significant risk in the market right now. A 1,000 point drop in less than a week is entirely possible.

The best advice out there right now for investors: BE CAREFUL! Tight stops and cautious moves. Even a small trade can earn you a lot or put you in the poor house. There is no need to be agressive right now.

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