The major stock indexes staged a major reversal by the close on October 4, 2011. On that day, the Dow Jones Industrial Average (DJIA) rallied higher by nearly 400.0 points in the final 45 minutes of the trading day. Yesterday, the major stock indexes rallied higher creating a follow through day for the major stock indexes. That type of action is a short term positive for the major stock indexes.
The problem for the stock markets is the longer term outlook. The problems in the European Union is an absolute disaster. Greece is really the tip of the iceberg when it comes to the European debt problems. What about the rest of the Euro-zone countries such as Italy, Spain, and France? These countries are much bigger than Greece, Portugal, Belgium, and Ireland. Who is going to bail these countries out?
Next, there is the problems in the emerging markets. China is clearly slowing down and facing it’s own set of problems. High inflation is now starting to hurt the Chines economy. If the Chinese people begin to consume less many companies that do business there will suffer. Companies such as Yum Brands Inc.(NYSE:YUM), and General Motors Co (NYSE:GM) are just two of the many corporations that will suffer. The Chinese have also been considered the growth engine of the world. If the Chinese stop investing abroad there will be a new set of problems that many investors are not taking into account. The Chinese are dealing with a real estate bubble and many labor problems as workers feel they are severely under paid. Investors should remember that the problems in China could turn out to be more important than the problems in Europe.
Traders and investors that are trying to ride the short term momentum in the stock market should realize that it could end abruptly. The central banks continue to simply create money in order to solve the debt problems in the world. Creating money is simply creating more debt and that is what caused the problem that we are in right now. Albert Einstein said that insanity is doing the same thing over and over again and expecting different results. We must be insane. While the short term momentum is up the bigger picture for the stock markets is down.