May 9, 2010 Bulletin Subject: Trouble in Europe Causes Markets to Plunge

Dear Valued Subscriber,

Last week's 600-point plunge in the Dow Jones Industrial Average has wiped out the year’s gains for most of the major U. S. equity benchmarks.

Greece's bailout and doubts about European leadership's ability to stem a contagion were among the major reasons for the decline. Extending its steep slide since December 2009, the euro tumbled against the U. S. dollar last week changing hands at March 2009 levels.

Shaking investor's confidence, an unconfirmed typographical error in entering index futures trades caused the DJIA to plunge nearly 1,000 points in a matter of minutes on Thursday afternoon before rebounding sharply.

Against this unnerving backdrop, even a generally favorable April U. S. employment report was unable to stir the bulls.

While stock prices in all sectors declined last week, materials and energy were among the bigger losers. A stronger U. S. dollar and Australia's imposition of a mining 'super tax' on natural-resources companies added to these sector's woes.

The obvious question is what lies in store ahead?

The situation in Europe poses some risk of derailing a fragile U. S. recovery. If European leadership gets its act together and prevents a 'contagion', the U. S. economy can continue to recover and the risk of a double-dip recession should be low. Under this likely scenario, the downside in stock prices should be relatively contained.

The downside risk to equity prices can however escalate quickly in the event of double-dip recession since U. S. interest rates are already low and the Federal Reserve has limited ammunition at its disposal to fight another economic slide.

As such, it is important for investors with shorter time horizons or lower risk tolerance to maintain adequate cash reserves. The dip in the S&P 500 below our 1156 target gives aggressive investors an opportunity to add to equities. With reference to the May Indicator Update, the recommended cash level now is 5% to 30% depending on your investment objective and risk tolerance.

Best regards,
Sam Subramanian PhD, MBA
AlphaProfit Investments, LLC
Ideas. Insights. Results.
http://www.alphaprofit.com

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