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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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    he following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes

    See Part 1 for prior week market movers and their lessons for the coming week

    1. Reaction To Q3 Earnings: Will Reality of Global Slowdown Again Overcome Central Bank Manipulations?

    As we noted in OCTOBER 21-6 MARKET MOVERS & LESSONS: BEWARE DECEPTIVE QUIET & BOND MARKET SIGNALS, for most of the prior year, markets have rallied impressively due mostly to central banks stimulus and the expectation of more to come. "Over the past three weeks however, the reality of the global slowdown has forced its way back into market consciousness because it is now showing up in Q3 earnings reports."

    We've just completed the third week of earnings season, after which it typically loses its influence on markets because the tone is already set and is theoretically already priced in.

    If however, earnings and revenues reported continue to miss forecasts at higher rates than seen in years, and markets continue to retreat on that news, we may have a the start of a change in perceptions that drives markets lower. If markets continue to sell off on bad earnings news, that would likely mean that that investors no longer believe that central bank stimulus and money printing alone can continue to drive asset prices higher while the global slowdown hits corporate performance in earnings and revenues.

    The coming week or two should clarify whether unlimited monetary easing has reached the end of its effectiveness.

    We also note in the above post that in fact the earnings picture is even gloomier than it appears when one considers that the higher rate of missed forecasts is coming despite these forecasts having been repeatedly lowered, and there are signs that Q4 earnings season could be even worse. See here for details. also notes here that there are signs we'll see further downward revisions for Q4 earnings season.

    Finally, although earnings season is past its third week, there are still some marquee names that might influence market sentiment. See any good earnings calendar for details.

    2. US Monthly Jobs & Related Reports For September

    Monthly US NFP, unemployment, and related reports that hint at the Friday result together form what is, taken together, potentially the most market moving group of reports for the month. Pay particular attention to the ADP version of the NFP report (Thursday), because its preparation process has been revised to more accurately predict the actual official BLS report that's released on Friday. This purported greater accuracy could make any surprises from the ADP version more influential. The consensus for the ADP version is for ~140k new jobs, so variation of over 10% either way could be market moving.

    Given that this is the last jobs report before the US presidential elections on November 6th, it takes on added significance, because if it's positive it raises the odds of an Obama re-election, and if negative, makes a Romney victory more likely. Granted, interpreting which result is more market friendly is not simple. Generally, Republicans like Romney are believed more market friendly, though some fear he'll pull away the stimulus punch-bowl faster. While that's better for the US in the long run because it reduces debt and the deficit, in the short run that would hurt risk assets.

    3. Watch The Spread Between High Yield And Investment Grade Bonds

    We also noted in the concluding section (Lessons, Ramifications) of the above mentioned article that

    bond markets are flashing a warning that equity and other risk asset markets have not priced in enough risk of pullback and so remain too high (still near 2007 highs in the case of stocks).

    Pay attention to the spread between high-yield and investment grade bonds, which per Barclays (via are now at three year highs. In other words, bond buyers are paying more than they have since late 2009 for safety.

    4. Technical Indicators Overall Bearish-May Be Self-Fulfilling

    As I mention repeatedly in The Sensible Guide To Forex, even most of those who aren't true believers in technical analysis will readily concede its importance, simply because so most investors do use it and hence negative indicators on price charts can create their own self-fulfilling prophecy.

    Here are just a few technical indicators to consider.

    Bearish Weekly S&P 500 Chart

    First, consider the chart below.

    (click to enlarge)


    Source: MetaQuotes Software Corp,,

    04 OCT 27 2344

    1. We've an established 3 week downtrend confirmed by a series of lower highs and lower lows

    2. The bellwether index has dropped below and out of its Double Bollinger Band Buy Zone (bounded by the upper orange and green Bollinger Bands). This suggests a critical loss of upward momentum. See here for details.

    3. The weekly chart shows that the index may be forming a bearish Head and Shoulders pattern.

    4. The index is still holding above 1400, a mere 160 points below decade-plus highs around 1560, even though global growth and earnings are falling apart and virtually unlimited stimulus is already priced in. That means we've very limited room to climb before hitting 12 year old resistance (that's strong) with little fundamental 'fuel' to power past that level.

    In sum, while markets could remain within their trading ranges, the longer term bias is to the downside.

    Deteriorating Growth Rate of Core Capital Goods Orders

    A number of prominent analysts have noted this. See here for details on their findings. The short answer: not good.

    5. EU: Maybe Some Market Moving Noise But Little Risk Until After US Elections

    Greece will vote this week to approve measures that the Trioka demands in exchange for more loans that Greece cannot repay. Not worry, the motions will likely be passed. Why not? Greece has little to risk given that the EU has forgiven past failures to comply in order to avoid contagion risk from a Greek default.

    Yes, markets may get spooked by the usual German talk about getting tough with Greece or Spain, but there's little need to take it seriously until after the US Presidential elections of November 6th. Germany has in the past backed down anyway on fear of contagion from a Greek default. That fear, along with Washington's request for quiet, should mean the EU remains a lesser market mover this week.

    However we completely agree with German Finance Minister's warning that "the worst is yet to come." Why not? Nothing has been solved, and the temporary solutions being used to buy time involve yet more debt and money printing, making the ultimate defaults and their collateral damage that much bigger.

    The current consensus is that Europe continues to "muddle through" for the coming years. That's a glorified way of saying "we don't know what will happen," the EU's primary survival tools have been buying time via:

    1. Additional lending to those who can't repay their current debt load, using cash created out of thin air
    2. Meetings that typically do little besides arrive at plans to make future plans, or actually do make plans involving temporary unsustainable solutions that are variations on #1 above.

    Obviously that's not a sustainable solution, though the timing of the point at which confidence in the EUR and EU collapses remains impossible.

    6. Other Calendar Events

    Beyond the above mentioned events, here are a few others that might be market moving. See any good economic calendar for further details.


    Japan: Bank of Japan monthly rate statement and press conference- suddenly significant because the BoJ just announced new stimulus and probably needs yet more, so the press conference might yield clues about when that might be coming. That in turn would move the USDJPY and USD index.

    EU: ECB President Draghi speaks, Italian 10 year bond auction

    US: CB consumer confidence

    7. US Election Related News

    As noted above, it's not clear which candidate is really perceived by markets as more pro-market, even though Romney is obviously the more sympathetic of the two to the market participants and others who are net tax payers rather than net consumers of government cash. Those who prefer the short term benefits of QE 3, currency debasement, and minimal progress on deficit reduction are likely to see Obama as more likely to continue that along the "extend and pretend" path.

    So while the latest polls may influence markets, it's not completely clear how, though we still suspect Romney is seen as the more pro-market, at least in the US. I recognize there are those who disagree and that I may catch some firm disagreement in reader comments. That's fine with me.

    Longtime followers of mine know I try hard to keep these articles objective.

    From the perspective of those for whom it's a priority that the US dollar retaining its purchasing power and reserve currency status over the long term, the evidence suggests Romney would be the better candidate, though it's not clear that either candidate will have that much freedom to do what he'd prefer. For the sake of brevity, I'll leave it at that, though I'm curious to hear what readers think on this point.

    Whoever wins, we expect the long term debasement of the USD, EUR, JPY, and other currencies subject to similar central bank policies, to continue. For those lacking a clear plan for how to protect their assets and diversify out of these currencies and assets denominated in them, strongly consider reading The Sensible Guide to Forex (Wiley, 2012)



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

    Oct 27 10:37 PM | Link | Comment!

    What Last Week Tells Us About This Week

    Last week, the biggest market movers were bullish sentiment about Spain, both rising hopes for a bailout and its avoiding a credit downgrade from Moody's, and overall bearish earnings reports that confirmed the global slowdown.

    As we discuss below, the very fact that these were the prime market drivers is very significant.

    One-Minute Weekly Summary

    First, here's how the week broke down.


    Markets were overall higher on good data from China and the US, as well as on optimism about a coming Spain bailout and more stimulus from China. A Citigroup earnings beat and solid US retail sales also helped European and US stocks.


    Asia, Europe, and US markets were all higher, primarily due to German comments expressing support for a "precautionary credit line" for Spain that wouldn't carry the full stigma of a bailout, and thus be acceptable to Spain. Earnings beats from JNJ and GS also helped.


    Markets were overall higher (despite weaker earnings from JNJ and Intel), mostly due to Spain avoiding a credit downgrade to junk from Moody's and strong US housing starts.


    Markets were mixed as bullish news (China GDP meets forecasts, successful Spain bond auction, solid UK retail sales) balanced key earnings misses in Europe (Nestle) and the US (Google).


    Disappointment on the EU summit and earnings sent markets lower, wiping out much of their gains for the week and leaving them only modestly higher.

    LESSONS & SIGNIFICANCE: Overall Bearish Implications

    As noted above, last week, the biggest market movers were bullish sentiment regarding Spain, and overall bearish earnings reports. Miscellaneous data points (like China meeting its reduced GDP forecasts and solid US retail sales) and EU crisis utterances had some short term effects, but news related to Spain and earnings were clearly the big market movers.

    The fact that these were the top market movers suggests some dangers ahead for the coming weeks.

    Here are the key lessons to keep in mind for the coming week.

    1. Rising Risks Of Disappointment On Spain Bailout Delays Risk Pullback, Perhaps New Crisis

    For weeks now, markets have risen on hopes that soon insolvency risk for Spain would disappear for the near future because once Spain's regional elections were over on (October 21st), Spain would cooperate with the EU and make the needed aid request for the ECB's OMT unlimited Spain bond buying program to start.

    That hope could well be unrealistic.

    The regional elections of October 21st in the Basque country and Galicia do signal an end to Madrid's domestic political concerns. In less than 4 weeks there's another important regional election in Catalonia. Remember that mere weeks ago we were hearing secession threats from Catalonia, as it resents subsidizing Spain's poorer regions. So Rajoy may well not yet be ready to cooperate with the Catalonian elections coming up.

    Meanwhile, time is working against Spain.

    There are simply too many things that can yet go wrong and ignite another bout of EU anxiety about the ultimate solvency of Spain and the EU as both sides play yet another dangerous game of brinksmanship to please their voters back home. Consider:

    • Losses in these elections for PM Rajoy's People's Party could make it harder for Spain to muster the needed political will cut public spending, even if things don't get worse for Spain.
    • Unfortunately, odds favor further deterioration:
    • Spain economic data continues to be awful. For example, It's banks continue to bleed deposits and their bad loan rates are rising [chart???].
    • Yet another Spanish autonomous region, the Balearic Islands, announced plans on Friday to request aid of 355 million euros from the Spanish Government's Liquidity Fund for the Autonomous Communities, raising the risks that the regional bailout fund may soon be overwhelmed before. It's likely that Spain's regional finances will worsen, so Spain my suddenly find itself needing a bailout without enough time needed to arrange it.
    • Other Events Could Stop Or Delay Bailout & Ignite New Fears, Crisis

    Spain may be too important to fail, but there are so many moving parts to this bailout that the chances of failure grow as time goes on. A fatal delay that ignites new Spain solvency worries could come from

    Increased German demands due to upcoming German elections, trouble with Greece, a rating agency's action, or other unforeseen domestic or foreign issue could suddenly make the bailout look uncertain, or at least too unlikely to happen in time before Spain's solvency is again in doubt. That would once again send Spain's borrowing costs soaring and reignite worries about the stability of the Euro-zone and the Euro. As we've seen before, that worry could then send other GIIPS bond yields soaring and suddenly the EZ is again in flames.

    2. Poor Earnings Suggest Reconnection To Underlying Economic Fundamentals, Futility of Central Bank Actions

    Since the Spring of 2012, we've had an odd disconnect between risk asset prices and global economic fundamentals. Most risk assets have maintained an uptrend while global economic data has deteriorated. Earnings season thus far has been as disappointing as expected. The justification for this was that more central bank easing would yet again inflate asset prices.

    For example, per a recent Reuters report:

    "Based on results from 116 companies and estimates for the rest, earnings for S&P 500 companies are expected to decline 1.8 percent from a year ago - the first such decline in three years…So far for the fourth quarter, there have been 17 negative outlooks from companies, no positive outlooks and one in line. That compares with 11 negative outlooks, two positive outlooks and two in line at a comparable period for third quarter guidance."

    See here for details.

    If next week's results continue in the same direction, markets will need to consider whether we've reached the end of stimulus based rallies that have brought them near pre-crisis highs without the underlying fundamentals to support these prices.

    This leads to the following conclusions.

    3. Upside Potential For Risk Assets Very Limited

    In sum, if markets are moving on hopes for Spain, and they're pulling back on bad earnings, we have a problem.

    In addition to the above, consider:

    a. Chances Of Pre- "Fiscal Cliff" Selling

    Added to the above concerns is whether US investors may start to sell in order to book capital gains at the low 15% rate in order to avoid likely higher rates that could well be coming as part of the fiscal cliff negotiations.

    b. Technical Barriers Firm In Absence of Bullish News

    Friday's action was the most interesting of the week, as a world-wide market pullback wiped out major chunks of the week's gains for most major stock indexes, leaving them with minor gains at best over the prior week's pullback.

    There was no definitive explanation for the Friday profit taking, leaving us to suspect technical resistance, in the absence of news to justify further gains, was the real culprit.

    For example, looking at the weekly chart of the S&P 500, the 1450 zone has held firm for the past 6 weeks.

    As usual, the S&P 500 is an accurate barometer of risk appetite. Other bellwethers of risk appetite, like the DAX, the EURUSD, Brent crude oil, etc, all show similar stalling at resistance for the past 6 weeks.

    So another big lesson is that despite all the stimulus coming or anticipated, markets still need some meaningfully good news to move higher.

    So What To Do?

    We maintain our current position. We don't start selling risk assets while the overall up trends remain intact, and we're not establishing new longs at this time.

    We reiterate our weekly warning that all of the most likely scenarios we see coming involve a vast expansion of the supply of dollars, euros, yen, and also of other currencies as nations seek to protect their exports' competitiveness with cheaper currency.

    That means we all need to start diversifying into the more responsibly managed currencies or into assets denominated in them. For details on the best collection of the safer, simpler, less demanding ways to do this than generally found in guides to forex markets or to investing in foreign assets, just type "The Sensible Guide To Forex" into your search bar.


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

    Oct 20 11:15 PM | Link | Comment!

    There Are 10 Things You Absolutely Need To Watch This Week

    Here are the top likely market movers for the coming week. We start with the usual epicenter the great financial crisis ever since December 2009, the EU.


    As we've noted repeatedly over the prior weeks, in keeping with Washington's request as reported by Reuters, we expect relative quiet from the EU until after the November 6th elections. Still, that didn't stop Spain bailout related news from being a top market mover last week, as we noted in our earlier post, PRIOR WEEKS' TOP MARKET MOVERS' 4 KEY LESSONS FOR THIS WEEK.

    As noted in that article, we question the belief of many that after the October 21 regional elections, Spain would cooperate with the EU and make the aid request needed to activate the ECB's OMT plan to buy Spain bonds and remove default risk for at least the coming months. There is plenty of room for further delays, which could scare markets and send them lower as Spain and the EU (really, Germany) continue to engage in brinksmanship and risk another bout of EU crisis. See the above article for details.

    Ironically, although markets crave a Spain bailout because it theoretically removes Spain default risk in the coming months, it utterly fails to meet our criteria for being even a step in the right direction for the EZ. See7 CRITERIA FOR DISTINGUISHING REAL EU CRISIS SOLUTIONS FROM FAKES.

    Like all the other EU 'solutions,' this one just adds more debt to a nation that cannot repay its current obligations, and so it just buys some time at a potentially enormous cost of making the eventual default that much more damaging (greater real losses, greater debasement of the euro as it's printed in greater quantities to repay nominal amounts owed, a crippling credit crunch as EU borrowing rates soar to compensate for being repaid in debased euros, etc.)


    Also as noted in PRIOR WEEKS' TOP MARKET MOVERS' 4 KEY LESSONS FOR THIS WEEK, there's a real risk that these elections, and another in Catalonia, suddenly make the assumed coming bailout less likely. There are many other potential obstacles, but markets are expecting this first one to be surmounted this week. If not, that adds bearish uncertainty about Spain's future solvency.


    Ok, no one expected much progress, but the EU's inability to act decisively while it still has time again reminds us that it cannot be relied upon to act fast if the need arises, and raises the risks that the EU could lose control of the situation and cause yet another crisis from sheer lack of market confidence in the EU.

    The US is the other likely source of major market moving events this week.


    After its third week, earnings season loses influence as the overall tone has been set, so this is the final and climactic week in which most of the remaining marquee names report.

    Like the second week, it features many bellwethers in the financial, technology and industrial sectors. As expected, earnings are down year over year. Meanwhile, Q2's trend of most companies beating earnings expectations but missing sales estimates has continued. That's bad, because firms have largely exhausted the benefits of cost cutting in recent years, and need to show sustainable sales growth in order to convince markets they can sustain earnings growth and justify rising share prices.

    Given its prominence and sheer sex appeal, Apple is the big name this week, but there are many others that could draw attention and move markets in the absence of bigger news. See any good earnings calendar for a listing of the most prominent sector leaders announcing each day.


    The second big US event this week that could move markets is the FOMC policy meeting and statement issuance Wednesday. With unlimited QE already baked in, the statement could move markets if it offers new insights on:

    • The Fed's prognosis for the economy
    • The pace and timing of its mortgage bond purchases

    Many, including the Fed, believe that healing the housing industry is key to healing the banking sector, and both are seen as critical foundations to a real US recovery. You know, one based on people actually becoming wealthier and spending money that they actually have or can afford to repay.

    Indeed, the Fed is so convinced that QE 3 is essentially a mass purchase of mortgage backed bonds.

    Many believe that QE 3 (and prior QE programs) were in fact just more stealth bailouts to prop up housing and the banks overloaded with bad mortgages). Consider:

    • The US economy continues to struggle
    • QE has not proven to be a cost effective way of creating jobs. For example, per San Francisco Fed Chief John Williams, the $600 bln QE 2 created 700,000 jobs, implying a staggering $857,142 spent per job created [$600,000,000,000 / 700,000 jobs]. I could be wrong, but I assume that each of these jobs will not pay $857K over the course of their existence in real terms.
    • Meanwhile, the assorted stimulus programs have added trillions to our national debt, have weakened the USD, and have potentially expanded the money supply enough to keep the USD falling. Remember, 70% of US GDP is consumer spending, exports are a relatively small part of GDP, so a weak dollar hurts the US more than it helps.

    While some point to the recent jump in housing starts as proof that the housing sector is recovering, others believe it's bad news for housing because demand for new home sales isn't keeping up with the implied coming supply, and that could mean yet another round of falling home prices, increasing foreclosures, and weak bank balance sheets loaded with bad mortgages.

    So this week's new home sales will provide the latest look at whether the housing starts data is a sign of recovery or yet more problems in the housing and banking sectors.

    Indeed, although yet again we here much in the media that the critical housing sector has bottomed, there's plenty of evidence that the sector is still a complete wreck, and in many places is getting worse. See here for details.


    Other key U.S. economic indicators to watch this coming week include durable goods orders for September on Thursday, Q3 GDP on Friday, as well as the final reading for October on consumer sentiment from the Thomson Reuters/University of Michigan surveys.


    As noted in PRIOR WEEKS' TOP MARKET MOVERS' 4 KEY LESSONS FOR THIS WEEK, most risk asset markets have encountered firm technical resistance for the past 6 weeks, despite the plethora of new easing/money printing programs from many leading central banks. Given that markets have rallied for the past months on little justification beyond anticipated new stimulus, and that stimulus is now largely old news, we don't see where markets will get the fundamental data to fuel a break above current resistance, like the 1450 zone on the S&P 500, $117 for Brent crude, 1750 for the DAX index, or whatever your preferred risk appetite barometer.


    As noted in our earlier post, while it may be hard to get the timing of this, related to the firm technical resistance (as either cause, effect, or paradoxically both) is the temptation by many US investors to book profits in the coming weeks while the 15% capital gains tax remains in effect until December 31st.


    In case it wasn't already clear from the above, this is an unusually heavy calendar for the end of the month.

    In addition to the above mentioned events, others worth watching include:


    Australia: CPI

    China: HSBC flash mfg PMI

    Europe: Batch of mfg, services PMIs for France, Germany, and the EU, ECB President Draghi speaks

    US: New Home Sales, FOMC statement


    UK: Preliminary GDP

    US: Durable goods, pending home sales


    US: Advance GDP, UoM consumer sentiment

    See any good economic calendar for further details


    Here's a parting thought to consider. Well. Really well.

    1. There are so many dangers, the EZ debt crisis, slowing growth worldwide, the US fiscal cliff, the China slowdown, etc.

    2. Yet risk asset markets remain relatively resilient despite the dangers.

    Paradoxically, #1 is causing #2.

    How can that be?

    These threats are causing the largest central banks worldwide to engage in money printing on an unprecedented scale as a means of boosting their weakening economies. That money printing, or the anticipation of it, is causing of markets remaining at levels near their peaks before the Great Recession began in 2007.

    In sum, money printing is both the official response to these threats AND the reason markets have stayed high.

    Unfortunately, this solution is likely to become a huge problem, unless you're protected.

    One of the most likely results of this ongoing explosion of dollars, euros, yen, or other currencies from nations doing the same thing (typically to keep their exports competitively priced versus the falling currencies of their customers) is that your local currency, and anything you own that's linked to it, is going to depreciate.

    That means we all need to start diversifying into the more responsibly managed currencies or into assets denominated in them. For details on the best collection of the safer, simpler, less demanding ways to do this than generally found in guides to forex markets or to investing in foreign assets, just type "The Sensible Guide To Forex" into your search bar.

    Or just go to:

    and for more reviews, see


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

    Oct 20 11:11 PM | Link | Comment!
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