In a world of risk aversion, which started two weeks ago, the line forming on the sell side of the equation is long and the buy side is empty. If you are a contrarian, you’d have to have guts, but potentially will have a trading opportunity to be the lonely buyer heading into the end of the month, the end of the quarter, a holiday weekend, and a breakdown in the technicals. Dangerous! S & P 1040 was the precipice of a steep cliff. This was an obvious and well formed pattern. It is actually the pattern we were looking for to broaden into the summer on earnings reports. The catalyst for the market decline was China. The Conference Board in China revised its growth estimate down for April to +0.3% from +1.7%. March was up 1.2%, so the perception went from continued growth to no growth in one revision. Part of the problem is that the +1.7% was a “calculation error”, feeding the fear that we cannot trust the data from China. Remember, the world is looking to the US and China to be the net buyers of goods to lift the European economies out of the ensuing recession. So when China hits a pothole, it really shakes things up. What I’d be looking for is for China’s government to offer some reassuring words that plans to stimulate are still on track.
Another major concern is that the ECB is facing the expiration of $532 billion in one-year bank loans. There has been a great deal of nervousness ahead of this expiration, for fear that EU banks will be stuck scrambling for funds. Spanish banks have been of particular concern. The ECB is also expected to release the results of their solvency test of banks in July. What happens following this expiration could indicate how much reliance there is on the ECB. This expiration is not a surprise. However, it was being treated as an “uncertainty” that could cause a liquidity crisis. Yields on sovereign debt of countries that are at risk rose and money flowed into “safe havens”. That sent the 10-year US Treasury yield below 3.0% for the first time since April 2009. Even more stunning is that the 2-year Treasury fell to 0.5935%, the lowest on record. As a measure of panic, the flight to safety into bonds also triggered selling of equities.
It seems rather obvious that the flip side was Dollar strength. The Dollar Index had fallen hard after peaking in early June at 88.708. The subsequent decline twice challenged its 10-week moving average and held. That index is now at 85.33. Short-term resistance is at 87.458. Now that the Dollar has bounced, we can put a “stop” at 85.09. In Euro terms, the rally to 1.25 ran into resistance. The Euro rallied off of a new multi-year low, the lowest trade since April 2006. The recent low at 1.1877 is the level that everyone is looking at as the test low. Once again, it is as if traders see that we are up against key support levels and the game is to try and break those levels and see if it can create panic. To that end, let’s look at the CBOE SPX Volatility Index. The VIX spiked to 35 as the market challenged 1040. When the market fell to this level in mid-May, the VIX crossed above 48. Is there less panic now than a month ago? If we undercut 1040 and the VIX holds below the previous highs, it will be a bullish divergence. The same is true for many of the momentum indicators. If the S & P were to break down below 1040, but not garner the panic that traders hope to induce, it will create a positive divergence, which should cause some short-covering.
The world will be busy following the US market action and worried about what today might bring. To throw fuel on the fire, today’s pre-market open release of the ADP estimate on private sector jobs could have more weight than usual. One of the problems with the market falling to key support ahead of the last day of the month and the quarter is that funds are likely positioned for how they want the quarter to close. That means they only have a little dry powder for the end of the day. Since the move has been away from risk, those were the hardest hit areas by selling. While everything was down, the groups down the least were Household Products, Telecom., Food, Pharmaceuticals, Utilizes, and Healthcare. The move into defensive stocks is a form of panic. Volume expanded, which also weighs heavily against a bull scenario. However, it seems as though everyone is bearish. They got the data to confirm it. June’s Consumer Confidence Index fell to 52.9 from 62.7. This reading is still above the February low of 46.40, but a worrisome downtick.
Over the past two weeks, the cry “the sky is falling” has prevailed. Expectations are for the economy to roll into a double-dip recession. The global picture reflects sentiment that expects the IMF and ECB efforts to fail miserably. Even our own market has tossed aside the old adage, “don’t fight the Fed”. Technically, we’ve broken the support that is the neckline of a massive head and shoulders top pattern, albeit only by a fraction. Remember, market patterns are in the eyes of the beholder. We could see the bears make a strong run at breaking the pattern more convincingly, while funds sit on their hands for a photo-op at the end of the quarter. The bears have everything in their camp, and the bulls have nothing. Therefore, the bears have to break the back of the market right here, right now. If earnings aren’t the disaster than they now anticipate, it could provide a small catalyst for the bulls. The market volatility certainly isn’t aiding in any investor confidence. If anything, it has undermined the desire to invest in America through the purchase of stocks. I’d like to end on a positive note from an article on MarketWatch. Federal spending is expected to be 25% of the economy this year. It hit 23.5% under Reagan and was hovering around 22% in the 1990s. Profit margins for corporations hit 36% in Q1, the highest since records began in 1947. Under Reagan, the best ever seen was 30%. Hopefully, these data will shine through when companies start to report earnings in two weeks.
In a world of risk aversion, which started two weeks ago, the line forming on the sell side of the equation is long and the buy side is empty. If you are a contrarian, you’d have to have guts, but potentially will have a trading opportunity to be the lonely buyer heading into the end of the month, the end of the quarter, a holiday weekend, and a breakdown in the technicals. Dangerous! S & P 1040 was the precipice of a steep cliff. This was an obvious and well formed pattern. It is actually the pattern we were looking for to broaden into the summer on earnings reports. The catalyst for the market decline was China. The Conference Board in China revised its growth estimate down for April to +0.3% from +1.7%. March was up 1.2%, so the perception went from continued growth to no growth in one revision. Part of the problem is that the +1.7% was a “calculation error”, feeding the fear that we cannot trust the data from China. Remember, the world is looking to the US and China to be the net buyers of goods to lift the European economies out of the ensuing recession. So when China hits a pothole, it really shakes things up. What I’d be looking for is for China’s government to offer some reassuring words that plans to stimulate are still on track.
Another major concern is that the ECB is facing the expiration of $532 billion in one-year bank loans. There has been a great deal of nervousness ahead of this expiration, for fear that EU banks will be stuck scrambling for funds. Spanish banks have been of particular concern. The ECB is also expected to release the results of their solvency test of banks in July. What happens following this expiration could indicate how much reliance there is on the ECB. This expiration is not a surprise. However, it was being treated as an “uncertainty” that could cause a liquidity crisis. Yields on sovereign debt of countries that are at risk rose and money flowed into “safe havens”. That sent the 10-year US Treasury yield below 3.0% for the first time since April 2009. Even more stunning is that the 2-year Treasury fell to 0.5935%, the lowest on record. As a measure of panic, the flight to safety into bonds also triggered selling of equities.
It seems rather obvious that the flip side was Dollar strength. The Dollar Index had fallen hard after peaking in early June at 88.708. The subsequent decline twice challenged its 10-week moving average and held. That index is now at 85.33. Short-term resistance is at 87.458. Now that the Dollar has bounced, we can put a “stop” at 85.09. In Euro terms, the rally to 1.25 ran into resistance. The Euro rallied off of a new multi-year low, the lowest trade since April 2006. The recent low at 1.1877 is the level that everyone is looking at as the test low. Once again, it is as if traders see that we are up against key support levels and the game is to try and break those levels and see if it can create panic. To that end, let’s look at the CBOE SPX Volatility Index. The VIX spiked to 35 as the market challenged 1040. When the market fell to this level in mid-May, the VIX crossed above 48. Is there less panic now than a month ago? If we undercut 1040 and the VIX holds below the previous highs, it will be a bullish divergence. The same is true for many of the momentum indicators. If the S & P were to break down below 1040, but not garner the panic that traders hope to induce, it will create a positive divergence, which should cause some short-covering.
The world will be busy following the US market action and worried about what today might bring. To throw fuel on the fire, today’s pre-market open release of the ADP estimate on private sector jobs could have more weight than usual. One of the problems with the market falling to key support ahead of the last day of the month and the quarter is that funds are likely positioned for how they want the quarter to close. That means they only have a little dry powder for the end of the day. Since the move has been away from risk, those were the hardest hit areas by selling. While everything was down, the groups down the least were Household Products, Telecom., Food, Pharmaceuticals, Utilizes, and Healthcare. The move into defensive stocks is a form of panic. Volume expanded, which also weighs heavily against a bull scenario. However, it seems as though everyone is bearish. They got the data to confirm it. June’s Consumer Confidence Index fell to 52.9 from 62.7. This reading is still above the February low of 46.40, but a worrisome downtick.
Over the past two weeks, the cry “the sky is falling” has prevailed. Expectations are for the economy to roll into a double-dip recession. The global picture reflects sentiment that expects the IMF and ECB efforts to fail miserably. Even our own market has tossed aside the old adage, “don’t fight the Fed”. Technically, we’ve broken the support that is the neckline of a massive head and shoulders top pattern, albeit only by a fraction. Remember, market patterns are in the eyes of the beholder. We could see the bears make a strong run at breaking the pattern more convincingly, while funds sit on their hands for a photo-op at the end of the quarter. The bears have everything in their camp, and the bulls have nothing. Therefore, the bears have to break the back of the market right here, right now. If earnings aren’t the disaster than they now anticipate, it could provide a small catalyst for the bulls. The market volatility certainly isn’t aiding in any investor confidence. If anything, it has undermined the desire to invest in America through the purchase of stocks. I’d like to end on a positive note from an article on MarketWatch. Federal spending is expected to be 25% of the economy this year. It hit 23.5% under Reagan and was hovering around 22% in the 1990s. Profit margins for corporations hit 36% in Q1, the highest since records began in 1947. Under Reagan, the best ever seen was 30%. Hopefully, these data will shine through when companies start to report earnings in two weeks.