Market Could Still Plunge Further

George Brooks  |

Investor’s first read      - Brooksie’s edge before the open

Friday, May 25, 2012        9:15 a.m. ET

DJIA:  12,529.75

S&P 500:   1320.68

Nasdaq Comp.: 2839.38

Russell 2000:  766.57

The BIG picture is marred by negatives.  What isn’t a negative is at best an uncertainty. To mention a few – Greece and the euro, economic softness here and in Europe, India, China,  and, Brazil, risk of civil unrest even bank runs in euro-area countries, an ugly presidential campaign here and continuing dysfunctional Congress, traditional May-November seasonal weakness in stock prices.

The big question is have stock prices adequately discounted current negatives and how much worse they can become ?

I have been looking for a two-legged decline. One big plunge could accomplish the same thing, but what is needed is to flush out sellers and find a “comfort level” where  the negatives and uncertainties are fully discounted.  Most likely the market will  over-discount setting up a great buying opportunity.

Unfortunately, that will come at a time most investors are too petrified to buy.

In the interim, we are bound to get one or two pieces of good news. We are due for a declaration that Greece will remain in the euro or rumors that the U.S. Fed is likely to implement QE3 with comparable stimulative measures taken in Europe.

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This would create a surge in stock prices and may secure the lows hit since last Friday (DJIA: 12,289, S&P 500: 1291).

Odds favor the euro-problems will take longer to resolve and more time is needed to understand  just how much economies here and abroad  will contract.

I see further weakness as markets probe for a comfort level.

CONCLUSION: With a three-day weekend ahead, I don’t see much chance of a big upside without a dramatic  news development and have no idea where that can come from since the European summit meeting in Brussels yielded nothing concrete.

Expect any rally to run into resistance between DJIA 12,650 and 12,710 (S&P 500: 1335 – 1354). That would be a logical point for a second leg down to start.

So much depends on the flow of news. Expect a rally in Facebook (FB) to 34.60, then another slide into the 20s. It’s not Facebook so much as a bungled offering  and too much “supply” of stock in an uncertain environment.  At some level, where the demand/supply is in better balance, it will be a great buy.

George  Brooks


The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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