Fundamental analysis is supposed to be the main driver of stock prices, whether you are value-, GARP-, or event-driven. You need to know accounting basics for that. Then there is behavioral management, or herd investing. You need to be a psychoanalyst for that. Then there is technical analysis, which is supposed to distinguish between what people say and what people do. All you need here is pattern recognition.
For a moment of delusion, let’s pretend I am all of the above. By my technical book, July 7 was an “exhaustion” gap, as defined in the Edwards & Magee bible, Technical Analysis of Stock Trends, 7th Edition, pages 243-248. If I am right, the next support is a flimsy trend line at 1280, with a more likely 1260.
The dislocation in Europe is the main driver, in my opinion. The euro-dollar September future finally broke the 1.3980 level late today, and I see no stopping until 1.3750 – if you push me, 1.25. If Europe is the main driver, i.e. financial liquidity, then we should look at the 2007-09 period, and then at the mid-2010 period. Fibonacci tells this: A 25% retracement from the 2009 lows to the 2011 highs is S&P 1190. A 50% retracement from the July 2010 lows is 1190. So, while 1260-1280 are likely, 1190 makes more sense.
A number of important macro events are on the table. This takes the forecasting exercise out of the norm, which is why the range of outcomes is so wide. In other words, any prediction is subject to substantial revision. That being said, I am looking at the following really short term tidbits:
- Alcoa (NYSE:AA) reports $300mn more than expected revenues, but no betterment on the bottom line. What’s the hoopla?
- American Express (NYSE:AXP) stock is up today. Why do I want to own a high-end tourist card?
- Barclays (NYSE:BCS): We all know, or think we know, that they are going to pass the stress test, yet the stock is trashed.
- The euro-dollar September future closes at 1.3950, uncharted short term.
As of now, I am still 50% long, 30% short, 20% cash. The level to watch is S&P 1310 and my finger is on the sell button.
I forgot one important thing. This Friday the ECB will report the stress test results for its constituency. It has pre-empted the report by offering its support to those who fail. As I often said, it's not the news that counts but the reaction to it. Personally, I do not think this one is baked into the cake.
Disclosure: I am short AXP.
Additional disclosure: I am still short the euro/dollar and long SDS. I also own puts in AXP.