U.S. stocks opened with a thud Friday with the Dow Jones Industrial Average (^DJI) turning negative for 2012. The catalyst du jour was the worse than expected May jobs report released this morning, but the reality is stocks started to sell off all last month. While investors were hoping to put the month behind us, as far as the markets are concerned today may as well be May 32nd.
None of which matters in the here and now. Before you make another call to your broker or hide under your bed you need to do three things.
1) Understand what's causing the selling
2) Get a grip on possible bullish outcomes
3) Create a game plan for how you're going to deal with 1 and 2.
The Bearish Case
The Eurozone is in real danger of collapse. Europe as a whole and the individual countries are either in or entering recessions. There is rampant, horrific unemployment and a banking system in chaos.
The Chinese growth story is done. Growth is slowing faster than the Chinese expected. Imports are collapsing. They can't help us now.
The U.S. recovery is gone. The promising data from earlier this year has reversed.
These things aren't good or bad. They just are. These are real problems; the markets aren't just being irrational.
The Bullish Case
The Federal Reserve has a habit of injecting massive capital into the banking system at times like these. The effect is akin to jamming an adrenalin needle into the economy's heart; the long term effects are terrible but it gets things moving short term.
Europe also has a Central Bank. The ECB is apt to take a cue from the U.S. Fed and ditch their absurd austerity plans and start printing money. This will do nothing to prevent the absurd faux union's eventual collapse but it'll help for the moment.
Traders don't want to be short when either of these events occurs, particularly when the Fed and ECB act in tandem.
Cruel Summer Game Plan
There is strong technical support in the S&P500 1,250 - 1,260 area. It's where we started this year. None of the fundamentals change at S&P 1,250, but traders will start to put money to work at that level.
1,250 may not "hold" but money will be put to work on the long side if and when we get there. I intend to buy stocks if and when the S&P approaches that level.
My back-up plan is to sell those same stocks should the market drop more than 1% below that level. Investors need to control their losses; the gains take care of themselves.
If you want sugar-coating you came to the wrong place. The summer is apt to be bouncy if not cruel and ugly. Should 1,250 break there will be no clear technical support and the fundamentals, as laid out above, are unknowable.
My back up plan is to teach my son golf. If you intend to trade stocks this summer I suggest you come up with an alternative of your own.