Cliff Wachtel's  Instablog

For all the drama from the EU and US debt crises, and growing evidence of economic slowdowns in the largest economies, an objective look at risk appetite, regardless of your chosen barometer, still shows risk assets within relatively narrow ranges. For some perspective, look at the weekly S&P 500 chart below.

S&P 500 WEEKLY CHART COURTESY ANYOPTION.COM   02 jul 17 0356

Key points to note:

From the multi-year high in May around 1361 to the recent low around 1261 in the last week of June, we saw a 7.34% drop, most of which has been regained, with the index now around 1314.  So even with the past week’s loss from some scary events in the EU, the index is only down3.45%.

Thus far we have triple layered support around the 1300 level from:

• Both the 20 day (yellow) and 50 day (red) EMAs
• The psychologically important 1300 price level itself. Note on the daily chart  below how often this level (horizontal red line) has served as support or resistance

S&P 500 DAILY CHART JANUARY-JULY 2011, COURTESY OF ANYOPTION.COM   02jul 17 0027

Note also that until we get a decisive break below the 50 day EMA (red) the index does not tend to plunge.

Thus in essence for all the drama, we’ve been in fairly tight trading range, though since April 2011 we’re still in an overall downtrend. To get below the current strong support at 1300 and start the next leg of the downtrend that the above chart shows and the fundamentals in Part 1 and here in Part 2 suggest, we’ll need some more negative fundamentals to drive that move lower.

Here are the likely market movers for next week, and overall they provide plenty of negative potential to keep the downtrend intact, breach the 1300 level, and open the door for a longer drop into the mid 1200s.

For perspective though, from the current 1314 to the 1250 area, that would be another 4.87 % drop. That’s still nothing more than a normal 10% pullback from the April highs).

Now let’s look at the likely fundamental drivers for the coming week.

As noted in, as long as the German insistence on private sector “burden sharing” aka restructure , forcing losses on bondholders, whatever you want to call it, remains up for consideration, expect PIIGS bond yields, and thus default fears, to continue rising. The private sector is being frightened off from PIIGS bonds, sending PIIGS bond yields soaring to reflect the rising risk premiums associated with buying bonds backed by no one but Portugal, Spain, Italy, etc.

The latest and perhaps most worrisome development last week was Italy’s spiking bond yields, just when it must refinance over €60 billion of bonds in the coming 6 weeks. To give some perspective, that alone is about half of the entire Greek rescue package up for debate. Of course the ECB and other global leaders will do what they can to make sure these auctions are relatively successful. We just don’t know if they’ll succeed, with the private sector now chased away.

As long as there is no clear progress on a solution that prevents further fear of unknown losses from a PIIGS restructure (aka partial default), we can expect more uncertainty and fear to be reflected in rising PIIGS bond rates, which in turn feeds the fear cycle further.

The next chance for the announcement of such a plan is the EU emergency summit scheduled for July 21^st. Expect assorted EU and other officials to talk up the chances for a solution to the Greek rescue plan in the hope of keeping the fear and PIIGS bond yields from getting beyond the EU’s control. So it’s possible that markets may stay hopeful until the meeting. The thing that might prevent that is….

As noted in Part 1, we find this year’s stress test results as unconvincing as those of last year. These were released after

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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?