Part 1: Prior Week Market Movers & Their Lessons For the Coming Week
The following is a weekly strategy guide for traders and investors, covering prior week’s market movers and their lessons for the coming week for traders of all major asset classes, via both traditional instruments and binary options. Perfect for those seeking a summary of prior week market movers and their lessons for the coming week and beyond, and a look at likely coming week market movers.
PRIOR WEEK MMS
As we noted last week in our previous article, markets somehow were managing to ignore the deterioration in the EU, and we doubted that could last. It didn’t. Before reviewing the prime fundamental market drive last week, let’s first look at what actually happened on the charts.
The weekly chart of the S&P 500, our preferred barometer for risk assets, continues the ongoing bearish theme for risk assets in general.
S&P 500 WEEKLY CHART COURTESY ANYOPTION.COM WEEK OF APRIL 24 – AUGUST 28 2011
Key takeaway points:
- Last week’s test of strong resistance (now a month old) of the 200 week EMA failed, with this week not only closing lower but forming a tentative bearish “shooting star” Japanese candle formation that will be confirmed if we get a lower close this week.
- The index completes its 5th week in the Double Bollinger Band Sell Zone bounded by the lower 1 (green) and 2 (orange) standard deviation Bollinger bands, indicating that the long term downward momentum on the weekly chart remains strong until proven otherwise. See this article for details on using and interpreting Double Bollinger bands.
- The weekly EMAs continue to form increasingly bearish layers, with the shortest term 10 week EMA (blue) already having crossed below the 20 week EMA (yellow) and both threatening to cross beneath the 50 week EMA (red) within the next 2 weeks. All three have now turned lower.
- The next leg of the down trend is now half formed, with the past week forming a new lower higher, Now we await a new lower low on a weekly close below ~ 1110
- If we look at the daily chart of the index for daily resolution, the picture isn’t any better.
S&P 500 DAILY CHART 25 JULY – 2 SEPTEMBER 2011 COURTESY ANYOPTION.COM
Key take-away points:
- The uptrend (red) line from August 23rd decisively broken with 2 consecutive lower closings each of ~1% or more
- The death cross (50 day EMA in red crossing under the 200 day EMA in violet continues to deepen
- Resistance at 1220 from the 50 day EMA and recent uptrend line (red) held firm
While stocks and other risk assets moved higher Monday – Wednesday, there were some notable divergences from other markets that contradicted the rally and ultimately proved correct.
- Except for Monday, the EUR moved steadily lower vs. the safer-haven USD all week.
Click to enlarge
S&P 500(red & green candles) VS EUR AS PER The FXE (red line) AUGUST 29 – SEPT 2 2011
NOTE HOW THIS EUR ETF WAS FALLING STEADILY ALL WEEK WHILE THE S&P 500 AND OTHER RISK ASSETS ROSE MONDAY – WEDNESDAY
The same holds true for the primary Hedges of against EUR and USD, gold and silver. Note the daily charts for these for the past week.
GOLD AND SILVER DAILY CHARTS 29 AUGUST – SEPT 2 2011 11SEPT04 0213
- This move up in precious metals was mostly a reflection of nervousness over the EU crisis on bad news from Greece, Italy and Spain (see below) as shown by:
- CDS spreads for Greek, Italian, and Spanish bonds moved higher this week as the ECB reduced its support for these bonds this week (perhaps to send a message to Italy and Spain to stick to austerity plans after Italy backed off from any serious plans to reduce its deficit like increasing taxes on the wealthy).
- U.S. 10 year bond prices moved higher, showing that markets were not averse to holding U.S. dollars, a typical reaction in times of great anxiety over the EU or non-U.S. related issues
So that’s the actual price action. Now let’s look at what was behind it all, and what that tells us about next week.
What were the fundamental drivers behind these moves on the charts?
Monday – Wednesday
A continuing technical bounce off near term support (1200 area for the S&P, 9000 for the Nikkei, etc) was fueled by:
- Greek Bank Merger: The #2 and #3 largest Greek banks, Eurobank and Alpha Bank, announced a merger Monday which would create the country’s largest bank with 146 bln euro in assets, aided by Paramount Services Holding Ltd, a Qatari investment fund injecting 500M euro of additional capital. The move was seen as a sign of stabilization in the Greek banking sector (or at least willingness by some to see the sector as a bargain rather than utterly lost cause).
- German Chancellor Merkel’s cabinet backed the new EFSF, which will be able to purchase sovereign bonds and thus provide them with additional support. Germany’s share in the loan guarantees was increased to 211B euro from 123B euro. As always, any confirmation of German support is a must for keeping hopes alive for the EU.
- Anticipated QE3 would lift risk asset prices as did QE2: Despite the dubious long term benefits of QE2, hope remained after last Friday’s announcement that the next FOMC meeting would be extended to consider all possible tools to stimulate the economy.
At least, these were the reasons widely given for the 3 day rally in most risk assets.
However, with risk assets hitting near term resistance (S&P 500 tapping 1230, upper end of 1200 resistance zone, the Nikkei around 9000, and the EUR/USD at the 1.4500 area), they needed some kind of fundamental driver to break past this level and turn a mere bounce off support into a real rally. Preferably that driver would come from the 2 problem areas, EU crisis and U.S. growth. The Friday U.S. monthly jobs report would have been ideal. Instead markets got a strong dose of the opposite. Ominous signs had been building up earlier in the week.
In the EU
- Italy further weakened its much anticipated austerity program by dropping higher taxes for the rich in favor of extending retirement ages. Bond markets responded with weak demand at the Italian bond auction Tuesday.
- A report surfaced that Greece had retained the law firm of Cleary Gottlieb – known for advising Uruguay, Argentina, and Iceland on their restructuring, to provide the same kind of advice. Greece didn’t deny the rumor, but said the firm had been hired to advise on implementation of the July 21st bailout agreement.
In the U.S.
Preliminary indicators did not suggest a positive surprise was coming for Friday’s jobs reports.
- ADP NFP showed a 91k increase in jobs vs. 102k forecasted.
- The 4 week moving average of weekly claims had risen to 410k from 407k.
- The Conference Board Consumer Confidence reading came in at its lowest level since 2009.
- The University of Michigan Consumer Confidence Report printed at its lowest level since Nov 2008.
Bad news begins to provide reasons for profit taking as major indexes like the S&P 500 and Nikkei were at near term resistance levels of 1230 and 9000 respectively.
In the EU
- An independent Greek parliamentary committee’s conclusion about its country’s debt was that it was “out of control… Despite gigantic effort for fiscal adjustment, no primary surplus has been achieved, on the contrary, the primary deficit widens.” EU Commissioner Rehn : Greece’s debt is on a “durable declining path.”
- Greek, Italian, and Spanish bond yields were rising.
- Europe was showing a series of weak PMI figures.
- Spain’s anticipated bond auction provided mediocre results, with low demand. Spanish and Italian 10 year bond yields were back to 2 week highs of 5.08% and 5.24% respectively, and the Greek 10 year yield had returned to its pre-bailout high of 18.17%.
- The EUR plummeted on ECB QE expectations.
In the U.S.
- The employment component of manufacturing PMI fell to the Nov 2009 low.
- The White House cut its growth and jobs forecast
Calls Of Rising Global Recession Risk
- PIMCO fund CEO El-Erian said that Europe’s recession risk has risen to 50%, and that he expected “the ECB to change course,” and lower interest rates. Euribor futures appeared to concur, and priced in a 25 basis point cut, accelerating the EUR’s slide.
- Economist Nouriel Roubini believed there was a 60% probability of global recession next year, with the Fed no longer able to provide emergency support. “The ability to backstop the banks is now impossible because of political constraints, and sovereigns cannot bail out their own distressed banks because they are distressed themselves.”
There was even worse news from both sides of the Atlantic.
U.S.: Terrible Monthly Jobs Report Dominates Friday, Bank Lawsuits Add To US Woes
U.S. Jobs Reports
U.S. jobs reports fell far below even the already low consensus expectations, coming in at 0 new jobs vs. 75k expected (150k is needed just to keep up with monthly additions of new job seekers). The details were as bad as the headline figure, showing official (excludes those who want work but have stopped looking) unemployment unchanged at 9.1%, showing declining average hourly earnings and weekly hours. In other words, more unemployed, and those who have jobs are making less.
While this bad news led many (Goldman Sachs) to predict imminent QE3, no “risk on” trade ever emerged, suggesting markets don’t yet expect the Fed to produce anything significant in the coming months.
New Trouble For U.S. Banks
There was another headline that was arguably even more disturbing, and which could influence markets next week –news that the Federal Housing Finance Authority (FHFA) was suing 17 banks for misleading Freddie Mac and Fannie Mae regarding the soundness of mortgage-backed securities these agencies had purchased from these banks. The U.S. banking system is already stressed from a slowdown in growth and spillover of financial strain from Europe. This news threatens to once again destabilize a U.S. banking system that has been teetering at the brink of crisis for years.
The EU: Bitten By Moral Hazard
Apparently both Greece and Italy believe they can go slow on austerity because the EU won’t risk a default and global crisis that would likely follow.
The Second Annual Greek Bailout Again In Doubt
Talks between the “Troika” (EU, ECB, & IMF) and Greece on a new tranche of loans collapsed over Greece’s failure to reach deficit targets. The IMF had previously said it wanted to finalize plans by September 5 but talks are now set to resume in another 10 days. Per the Troika, Greece just wasn’t showing sufficient seriousness in living up to its commitments per the second bailout plan.
Italy Backs Away From New Taxes On the Rich
As noted earlier, in its latest dilution of austerity measures, Italy cut new taxes on the wealthy, casting doubt on Italy’s seriousness about its claimed new austerity. Some speculated that with the ECB supporting Italian bond prices, Italy has lost its sense of urgency to reform, and the ECB’s absence from Italian and Spanish bonds auctions was meant to send a message. We doubt that will work given that the EU has thus far been unwilling to let a default happen, though that may change soon. See part 2 of this post for more.
Finland Collateral Demands Still Unsettled
Earlier in the week there were reports that Finland had withdrawn its demands for collateral from Greece given the impossibility of Greece needing to return much of the loan cash for collateral to Finland and all other nations that would then want the same security conditions. As of this writing, Finland had not yet agreed to rumored alternatives, leaving the collateral question an open item that could yet derail the bailout.
Lessons & Ramifications
- Stocks & Risk Assets In General: Barring some major positive surprise, the rally of recent weeks appears finished (it had little justification anyway unless you believed major new QE3 was coming and would have the same impact as QE2). As shown above, the technical picture on both weekly and daily charts has a bearish bias supported by deteriorating global growth in all major economies and exacerbated by yet further deterioration in the EU.
- Forex: The demand for safe haven currencies was so strong last week that even after the poor U.S. jobs reading the USD was firmly bid. That’s a sign of real fear. Risk currencies in general should remain under pressure vs. the CHF, JPY, and USD. The EUR/USD has pulled back to support ~ 1.4200, any decisive break below opens the door for a test of 1.400 and beyond.
- Commodities: Gold and silver retain their bullish outlook, the only question is whether to wait to buy on dips. That’s what we’ve been doing, and those who’ve followed our recommendation to buy on dips to around the 20 day EMA for both have already done well on the recent dip to that level. Whether gold can make a sustained move above $1900 will most likely depend on developments in the EU and other coming week market movers discussed in part 2.
As we noted last week, there’s a lot of event risk in September. See part 2 of this post for how much of it comes this week.
Disclosure / disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.