U.S. Debt Downgrade: The U.S. Capital Markets Can Become Even More Volatile

Includes: AGG, DIA, QQQ, SPY
by: Richard Suttmeier

I was a U.S. Treasury securities trader for many years in the primary dealer community in the early stages of my career. It is unheard of to question the full faith and credit of the United States. In my opinion, the downgrade of U.S. debt is the downgrade of all global debt. Since this is a milestone event it will be difficult to judge the long term impact to the economies and markets around the world. Short term volatility in the U.S. capital markets has already been extreme, so this downgrade just adds to uncertainties and should cause higher yields for this week’s auctions of 3-Year, 10-Year and 30-Year U.S. Treasuries. The S&P downgrade will not alter the fact that U.S. stocks entered a new Bear Market on August 1st.

The new bear market for stocks was ushered in last week with a 698 point decline for the Dow Industrial Average and a 224 point drop for the NASDAQ. The Dow broke the bull market trend that began in March 2009 and is down 11.1% from its May 2nd high at 12,876. The NASDAQ is down 4.6% year to date and 12.3% below its May 2nd high at 2887.75. Leading the downside is the Philadelphia Semiconductor Index (SOX) with a decline of 22.3% since May 2nd.

I always opined that you cannot have a bull market for stocks with bear markets in housing and the banking industry. The PHLX Housing Sector Index (HGX) is down 16.3% year to date and 25.1% from its February 18th high. The Regional Banking Index (BKX) which includes the “too big to fail” banks is down 20.7% year to date and 25.9% from its February 15th high. The HGX and BKX peaked early, which is when I first suggested that investors should reduce holdings in the stock market by at least 50%. Buying U.S. Treasuries were a great alternative until last Friday.

The yield on the U.S. Treasury 10-Year note declined 22.8 basis points last week to 2.566 percent, but the yield rose by 23.3 basis points from the year to date low yield at 2.334. This week’s value level is 2.762 with my annual pivot at 2.690 and semiannual risky level at 2.414. The key level to hold on weakness is my quarterly value level at 3.052. U.S. Treasury yields opened nearly unchanged Sunday evening.

Comex gold traded to a new all time high at $1,683.5 last week with Friday’s close at $1,660.8 was off the high, but gold was up $34.6 the Troy ounce. I do not have a risky level at this time, and the open Sunday evening following the S&P downgrade of U.S. debt was another new all time high at $1,696.1.

Nymex crude oil tested its 200-week simple moving average at $83.95 last week and ended the week at $87.06 per barrel down $8.90 for the week at down $4.32 on the year. I do not have a nearby value level and this week’s pivot is $88.12. The global economic slowdown has reduced demand for oil. Oil opened with another test of the 200-week simple moving average at $83.95 with a low of $83.68 Sunday evening.

The euro versus the dollar stayed above its 200-week simple moving average at 1.4026, and was nearly flat on the week at 1.4281.

S&P 500 Futures, which closed Friday at 1,197.80 opened as low as 1,161.0 Sunday evening then stabilized within Friday’s trading range. The NASDAQ 100 Futures, which closed Friday at 2187 opened Sunday evening with a low of 2125.75 and also stabilized within Friday’s trading range.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.