Dow Surges Today, but Prepare for a Wild Week

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The markets are off to the races in a week that promises plenty of drama. The news hasn't been great this morning, with consumer confidence plunging in May. The Consumer Confidence Index checked in at 64.9, which was down from April's 68.7. That's the biggest drop since October of last year, although that month saw the Dow Jones Industrial Average (INDEX: ^DJI  ) soar 9.53%. So far this month, the Dow is down 5%.

Consumer confidence can take a back seat today, though; markets are moving against that negative data. The Dow is up 0.65% while the Nasdaq (INDEX: ^IXIC  ) is up 0.58%, while the S&P 500 (INDEX: ^GSPC  ) checks in with a 0.61% gain as of 1 p.m. EDT.

Bad news, big rise?
Varying outlets seem to be attributing the rise to positive housing news. Fresh data shows that housing prices fell at their slowest rate in more than a year. In an awful housing market, the idea of things getting "less bad" is a good thing.

That seems to be corroborated by price movements in Bank of America (NYSE: BAC  ) today. The company is battling for the biggest gain in the Dow, up 2.66% on the day. Other banks haven't seen such outsized gains. JPMorgan Chase is up a mere 0.15%.

The biggest gainer on the Dow by a slim margin right now is actually Caterpillar (NYSE: CAT  ) , which is followed closely by Alcoa. These two companies are heavily affected by growth in China. They're likely gaining as reports surfaced yesterday that China was preparing a fresh round of stimulus that could total $315 billion.

However, I will note that the official Xinhua news outlet in China declared that the Chinese government will not roll out a massive stimulus in search of economic growth. While investors might be licking their chops at the prospect of another Chinese stimulus package (a reaction I disagree with), they're wrong to think any stimulus will be on par with the massive spending China rolled out during the financial crisis. To quote Xinhua, "The current efforts for stabilizing growth will not repeat the old way of three years ago."

Both Caterpillar and Alcoa have slid back from even more heady gains at the start of the day, so maybe investors have curbed their enthusiasm for a Chinese stimulus.

The week ahead
While markets might be moving in a peculiar fashion today, that's not anything out of the ordinary in the short run. In the long run, this week could sort out a lot of continuing story lines that are defining the global economy.

Notably, I'd encourage investors to keep an eye on the news around China's stimulus, which looks to be coming to a head; the Greek situation and the broader implication for larger countries like Spain and Italy; and the U.S. jobs number coming out this Friday. After a weak April showing, there will be a lot of attention paid to whether the low add of 115,000 last month was a blip or a sign of further deterioration to the job market.

Smart long-term ideas
That's it for this market checkup. While staring at stock screens all day can be bad for your health, the best investors don't pull out of the market. Instead, they find stocks they can live with for the long haul. Check out The Motley Fool's special report on long-term investing, where you'll find three promising stock picks for long-term investors, along with some tips on how to invest for your golden years. It's free, but don't wait -- get your report today while it's still available.

Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Bank of America and JPMorgan Chase. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (16)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 29, 2012, at 4:42 PM, TENOFWANDS wrote:

    The patient briefly inhales in between retches.

  • Report this Comment On May 31, 2012, at 6:04 PM, MHedgeFundTrader wrote:

    This is far and away the world’s premier banking institution. Estimates of the huge trading losses by the London “whale”, initially pegged at $2 billion, have since skyrocketed to $6 billion. I’ll ignore the Internet rumors that speculate about a $30 billion hickey. As you well know, almost everything on the net is not true, except what you read in my own newsletter.

    Back in the 1980’s when I was at Morgan Stanley, the inside joke was to look for nice office space for ourselves whenever we visited clients at (JPM). The expectation was that they would take us over when Glass-Steagle ended, as they were both the same institution before the Securities and Exchange Act broke them up in 933. When the separation of commercial and investment banking finally came in 1999, Morgan Stanley had grown far too big to swallow and the egos too big to manage.

    I’ll tell you another way to look at this trade. (JPM) lost 4.7% of its capital, so Mr. Market chewed 30% out of its capitalization. Sounds a bit overdone, no? The bad news is already in the price. A large part of the offending position has already been liquidated.

    I have analyzed the specific trade that got (JPM) into so much trouble, the now infamous “Investment Grade Series 9 Ten Year Index Credit Default Swap.” The chart of its recent performance and its hedge is posted below. It was in effect a $100 billion “RISK ON” trade that came to grief in early May.

    Few outside the industry are aware that this was a $6 billion gift to two dozen hedge funds who are now shouting about record performance. It is, after all, a zero sum game. Didn’t Bruno get the memo to “Sell in May and go away”? He obviously doesn’t read The Diary of a Mad Hedge Fund Trader either.

    Even if the worst case scenario is true and the $6 billion numbers proves good, that only takes a 4.7% bite out of the bank’s $127 billion in capital. It is in no way life threatening, nor requiring any bailouts. These shares at this price are showing an eye popping low multiple of 7X earnings, and have already been punished enough. Getting shares this cheap in this company is a once in a lifetime gift, and twice in a lifetime if you count the 2009 crash low.

    You don’t have to run out and bet the farm right here. Scale in instead, and if the market drops, you can always cost average down. If Greece forces us into major meltdown mode, we can also hedge this “RISK ON” trade through taking more aggressive “RISK OFF” positions, like selling short the (FXE), (SPX), (IWM), (GLD), or the (SLV) by buying puts.

    Mad Hedge Fund Trader

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DOW 18,169.27 -53.76 -0.30%
S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

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Related Tickers

10/25/2016 4:34 PM
^DJI $18169.27 Down -53.76 -0.30%
^GSPC $2143.16 Down -8.17 -0.38%
S&P 500 INDEX CAPS Rating: No stars
^IXIC $5283.40 Down -26.43 -0.50%
NASDAQ Composite… CAPS Rating: No stars
BAC $16.72 Down -0.05 -0.30%
Bank of America CAPS Rating: ****
CAT $84.48 Down -1.51 -1.76%
Caterpillar CAPS Rating: ***