For the past weeks I’ve been preparing Resource Speculator readers for a 10-13% stock market correction. Of course, this means that your share portfolio will take a hit. How do I know this is coming?
Simple: the Grexit and the US economy.
Greece is in crisis.
In Money Morning on 13 February, I told you that Greece will default and leave the Eurozone. Don’t underestimate the effects this will have on global markets. Resource Speculator readers will receive a report detailing how financial markets and commodities will react and move towards the end of this year. If you want to receive this report, find out more here.
Indeed, the indebted nation is becoming more of a basket case by the day.
At the recent Euro Working Group meeting Greece was ridiculed. The Greek Finance Minister, Yanis Varoufakis, was called an ‘amateur’ by the other Eurozone finance ministers. Tensions were high and relationships were at an all-time low.
With Eurozone finance ministers refusing to negotiate with Varoufakis, the Greek Prime Minister, Alexis Tsipras, reshuffled his negotiation team — pushing Varoufakis to the back.
This move is merely political. Greece can do whatever it wants and it won’t change a thing — it’s still broke and will default.
The country faces a tight deadline of debt repayments starting with a €780 million loan instalment to the IMF on 12 May, the day after a crucial Euro Group summit. If this meeting produces nothing, markets will panic.
The Greek government is running out of magic tricks. It started raiding citizens’ pensions to pay the bills in March. Days later it ‘borrowed’ money from Greek utilities. Recently the government ordered local governments to deposit their money into the Greek Central Bank — a measure aimed at netting €2.5 billion and keeping the bankrupt country afloat until the end of this month.
However, local government mayors have refused to play their game and pay up. They claim that the order is unjust and inappropriate. So where is Greece’s much needed monetary lifeline going to come from?
This isn’t all. It was rumoured that Greece didn’t have enough money to pay government bills last week. Of course the government claimed that there was a ‘technical glitch’. Right!
Time is running out…
Athens is waiting for a further €7.2 billion in rescue funds, and without that money it is unlikely the country can pay almost €1 billion due to the IMF before the middle of this month. It owes close to €2.5 billion for the entire month. And then another €11 billion in June and July to the IMF, the US Treasury and the European Central Bank (ECB).
Bond analysts are giving Greece a 90% chance of defaulting on its debt over the next five years. That’s up from just 67% on 1 March.
As I’ve said for months, a Greek default and exit from the Eurozone is inevitable. The only question is when. We’ll know for sure before 30 June when the default is likely to happen, though I can tell you it’s going to be a lot sooner than five years. More details will be in my report to Resource Speculator readers. To get access to this research, click here.
Financial markets are concerned. It’s no shock that last week the US Dow Jones declined into negative territory for the year. Currently, the ASX 200 is down almost 3.3% since its April high of nearly 6,000 points.
Yet, this is just the start…
The US economy has gone from bad to worse. Its quarter one economic growth came in at 0.2%! Down from the 2014 average of 2.2%.
It’s no surprise that US company earnings season was an absolute shocker. The US market matters because Aussies look towards it for guidance. General Electric [NYSE:GE], for example, reported a first quarter loss of $13.6 billion two weeks ago. This isn’t loose change! Then last week, IBM [NYSE:IBM] reported the worst sales growth since 2002. Revenue dropped by 11.9% to $19.6 billion.
Brokers are now in the process of downgrading earnings. Lower earnings forecasts and poor US economic conditions are sending the US dollar lower, resulting in capital outflows from the stock market.
Given that we haven’t seen a correction of more than 10% since 2011, it’s time. But this time around, we’re likely to experience a 10–13% pull back. The Aussie market will follow and likely experience a larger correction. This will be a massive buying opportunity.
Have a look at the chart below. It tracks the Dow Jones Industrial Index. Each bar represents one week.
Source: Resource Speculator; Freestockcharts.com
Indeed, there’s large uncertainty surrounding markets over the coming months. However, some technical targets can help provide you with a clearer picture on where we are heading.
A weekly closing last week on the Dow Jones below 17,963 points will signal a correction is likely to happen now. This target is shown by the upper blue trend line, which tracks the major resistance of weekly closes since 2011. Two weeks ago, the Dow dipped below this level at 17,842 points — an ominous sign. That said, the Dow closed at 18,024 points at the end of that week.That was above last week’s target.
From here, a weekly close below 17,705 points this month would confirm a correction is in progress. This target is shown by the black horizontal line, illustrating short term technical support over the past six months.
Nonetheless, the most important level is 17,100 points. This is shown by the lower blue trend line, which tracks major support of the weekly closes since 2011. Cracking this will confirm that we’re heading into the mid 16,000 point range. If the 11 May Eurozone meeting produces no result, expect this level to break this month. The Aussie market will follow the US lower. I believe that it’s highly likely that we could see the market return to 16,750 points (dotted line).
So get ready for a 10–13% correction. When that happens, the mainstream news headlines will be calling for a 50% correction. Don’t panic. They have no idea.
Don’t let this alarm you. When the stock market corrects there’s still one avenue to build wealth. I’m talking about the speculative end of the stock market. I’m recommending two of the best small cap mining stocks to Resource Speculator readers today. If you want to find out who they are, see here.
Resources Analyst, Resource Speculator
Editor’s Note: This article originally appeared in Money Morning.