Weekly Market Outlook: Sept. 8 - 12

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 |  Includes: BND, DBV, DIA, FXA, FXB, FXC, FXE, FXF, FXY, IEF, IVV, QQQ, SPY, TLT, UDN, UUP
by: Matthew Bradbard

U.S. federal regulators seized control of Fannie Mae (FNM) and Freddie Mac (FRE) on Sunday. This was a historic intervention aimed at stabilizing the mortgage market at home and credit markets worldwide. Expect this decision will cause ripples in a variety of the markets this week, if Sunday night is any indication with most markets gaping higher or lower.

As hard as it is to believe, we also will experience the seventh anniversary of the terrorist attacks on the World Trade Center and Pentagon this week. There will be opportunities that present themselves this week, but don’t be afraid to have a larger cash position in your commodity accounts as we may see further downside before we start the next leg up. The key is to have money when a great trade opportunity arises. Additionally, learn how to go short and utilize puts, as it is only a bet on direction.

Financials

Stocks: With a jump in the unemployment rate to 6.1%, the highest in nearly five years and a sluggish job's number it is evident that further weakness is ahead. Rumors of recent hedge fund troubles are also discouraging as these managers are supposed to be the smartest guys in the room. Last week the Dow lost 456 points or 4.0% to finish at 11227, the S&P was off 41 points or 3.2% to close at 1241; the lowest closes since late July. The tech heavy NASDAQ closed nearly 5% lower at 2256. As history would have it, the first week of September started off weak as this month has traditionally been a humdrum month for the stock market and this year seems to be no different. We cautioned investors last week not to believe the hype and to remain defensive. If that did fall on deaf ears we would repeat it, use rallies as exit doors as we expect more trouble.

Bonds: The immediate move in treasuries should be down, as of Sunday night prices in December 30-year bonds are down over 1 point and now 2 ½ points off Friday’s high, with 10-yr notes we are also 1 point lower as of Sunday night and just over 2 points below Friday’s highs. This may be an overreaction to the Fannie and Freddie news, but regardless of the reasoning we should see bonds find there way to 115’16 and notes to 114’00. This has turned into a sell rallies market as opposed to buy dips, at least this week. Look for some position squaring this week ahead of next week’s FOMC meeting where we expect no change in rates.

Currencies

The bank of Canada left rates unchanged last week at 3.0%. The September Canadian dollar dropped .25 cents last week, but managed to defend the .9300 level as we forecasted. Prices could go either way this week and will continue to look for guidance from energies and metals. Support just above .9300 should hold unless we see another leg lower in commodities, on the upside .9475 serves as resistance followed by .9600.

The ECB did not do anything with rates last week leaving them at 4.25% suggesting that even with a slowing economy on the brink of recession they are still concerned with inflation. The September Euro fell 444 ticks to $1.4236, the lowest close in almost 11 months. As we voiced last week we do not have the stomach for the day to day movement and would expect to see a bounce in the short term into the Fed meeting next week. Buying the December Euro on September 10th and selling on October 2nd has been profitable 8 of the last 9 years for an average of $2162. Past performance is not indicative of futures results.

Last week, outside of the dollar, the yen was the only currency to trade higher with September gaining 138 ticks to close at .9338 trading as high as .9480; the highest levels since late July. The weekly Japanese yen chart remains a buy, but the daily chart is overbought, on a move higher in stocks we should be given another window for a long entry. The carry trade lives on as investors need to buy back there borrowed yen to offset other positions in this environment. If commodities continue to falter and turmoil persists in the equity market both of these scenarios would be supportive to the yen.

The RBA cut interest rates ¼ point for the first time in almost 7 years and the Aussie currency felt it as prices lost 470 ticks or 5.5% on the week. The losses were attributed to their cut and most likely some large unwinding of the jy/ad cross trades. We expected the .8200 level to hold but as of Sunday night we had already seen a trade as low as .8020 in September. If we see some sideways action early this week we will start to shop some long entries, but we would suggest starting small and let the market prove you right.

The September Swiss franc broke out to the downside as did most currencies last week losing 141 ticks to close at levels not seen since the first of the year. The trend remains down, but if the other European currencies are able to stage a rally, albeit a small bounce after the massive downdraft, look for a bounce back up to previous resistance over the next few weeks at .9200.

For trend followers this trade has continued to pay off as the British pound closed 551 ticks lower and has now been lower 7 weeks in a row. It may be too early to call a reversal, but it appears we are getting a bounce from over sold levels as of Sunday night. We would look for last week’s low to hold at 1.7524 with the first resistance being the 9 day moving average at 1.7969. If we do get some dollar weakness or any positive news out of the UK we could see a bounce to 1.8450 before serious resistance comes into play. If that was to happen we would look for a short entry and would not suggest trying to time the bottom for a long as data continues to support a recession in the UK and rates, although were left constant last week, should move lower.

The dollar was up 167 ticks last week and has registered a positive week 8 of the last 9 weeks. Why? Because the environment is not as bad in the US as it is abroad. That to me is a weak argument and although I am a little embarrassed my clients did not make money on the recent advance in the dollar, I think investors need to choose their battles and believe in their trades and I don’t believe that the dollar should be appreciating. We don’t expect the Fed to do anything with rates next week or this calendar year for that matter, based on the current circumstances. We think it is feasible to see the dollar give back most of the recent gains in the coming weeks. Current resistance should be 79.50 with support around 77.50. Continue to monitor the dollar for other trades as it has served as a guide.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.