As I am sure I do not need to explain to those of you that follow the markets on a daily basis, this has been one of the most trying times in history for traders and investors alike. The markets have whipsawed back and forth for all of 2011, and probably more so than any other time in history. However, we are not done yet.
Current Market Risks
I am not sure if I would have the room in one article to adequately explain each and every market risk that exists currently, but let me at least mention a few.
The European Debacle
Let's first look at Greece, which has approximately €11 billion in debt maturing in 2012, which represents 6.55% of its total GDP. Until this point, we have been led to believe that Greece is in the worst situation of all the European countries. However, the United Kingdom has €14 billion in debt that is maturing in 2012, which represents 6.77% of its total GDP. Now, here is the kicker: Italy has over €16 billion in debt maturing in 2012, which represents 7.5% of its total GDP. Therefore, it is quite clear that we are nowhere near done with the European debacle. Furthermore, if the European Union is having such a difficult time dealing with Greece, what is going to happen when Italy now comes to the forefront?
What is making this situation much more dire is that the Italian borrowing costs have recently soared. In fact, yields have risen from 4% to over 6% within the last 12 months. This has meant an additional 40€ billion a year in additional interest costs. This is in addition to the fact that the Italian economy has been contracting as we speak. In fact, Nouriel Roubini is suggesting that Italy will experience continued negative growth starting in Q3 2011.
So how much longer do you think it will be until this nightmare rears its ugly head, the size of which will dwarf the Greece issue?
When, and not if, it does, you will see further financial firms with liquidity crunches, forcing more of them into bankruptcy. Now, what happens to investors when more firms go into these types of liquidity crunches? I think you can figure that one out.
CME Margin Change
In what seems to be a mostly unnoticed move, as of yet, after the close on Friday, the CME announced a margin adjustment for all of its products as of the close of business on Friday, November 4, 2011. They now require a 1:1 initial margin ratio on all products. This is attempting to ease the otherwise significant margin call for potentially hundreds of billions worth of its products, which include gold, silver, oil and equity futures contracts, due to the MF Global (MF) asset transfers to other brokers.
Effectively, this means that there is a significant easing for options and futures holders of the amount of additional capital needed to be deposited by the former MF Global account holders to the CME by the close of business on Monday.
Since this new requirement is being specifically aimed at alleviating the financial burden for the accounts being transferred from MF Global to other dealers, it seems the CME is expecting that these transfers can have a serious impact upon the markets at large. Since most of these accounts are reportedly long positions, the risks are predominantly to the downside, as a significant amount of additional collateral may still need to be raised.
If you remember back to a similar situation after the Lehman debacle, it took several days for these situations to sort themselves out in the market until it had a real effect upon the overall markets. If we see the same type of delayed effect on the transfer of accounts to other brokers, it actually leads right into a November 10 turn date I have been looking towards to begin a significant decline in the markets.
However, as there still a significant amount of confusion about the CME's adjustment, the effects of which may not be realized for several days.
The U.S. dollar has seen some significant upside pressure, which has seriously catapulted it upwards over the last week. In fact, it seems that it currently is looking towards ever higher levels shortly. Clearly, this will not have a positive effect upon the equity markets.
With their house literally burning, the G20 can't even smell toast burning in the kitchen. They are not even planning on meeting again until the end of the year. The lack of urgency within this larger group is simply astounding to us watching from across the pond. Do we really believe that this "organization" will open their eyes before the house has been reduced to embers?
This now brings me to my market forecast for what remains of our 2011 calendar year, and it is setting up to be a very difficult one for those that are unprepared.
Based upon my technical work, I am seeing us topping this week and most probably by the 10th of November. Depending upon how the market reacts on Monday, the top at that time will either be within the S&P 1265-1275 range (my primary target), or it will be as high as the 1305-1315 range.
However, once we reach the 10th of November, be prepared for a decline that will take us down into the Thanksgiving holiday, with targets as low as S&P 1180. Yes, we are predicting an estimate 100 point drop within a period of 2 trading weeks. Clearly, this is something we probably have become almost accustomed to already.
Thereafter, I am seeing a 100+ point rally that can potentially take us into year-end (maybe a little longer), with upside targets as high as 1330-1340 in the S&P 500. But, I must warn you that this could be the highest level the market will then see for the next several years, as it could be setting up an apocalyptic decline that would make 2007-2009 look like child's play.
One last note: Even if my specific timing does not work out exactly as I present it, the fact still remains that we will soon re-test the 1180-1200 region before being able to move back up to the 1320-1340 region for a final top. That is my ultimate point.
Disclosure: I am short SPY.