Cliff Wachtel's  Instablog

WEEKLY REVIEW/PREVIEW: Enough Positives To Continue Rally To Upper End Of Trading Range

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 & their lessons for the coming week and beyond, & a look at likely coming week market movers.

• EU optimism, Upbeat US data fuel rally in risk assets to the upper end of their 2 month trading range
• No fundamental improvement, though markets capable of overreacting to sense of progress in the EU, so rally could continue on hopes (again unjustified) for good news from October 23rd EU summit
• EU optimism not justified until we see commitment to sacrifice both
  • Lifestyles to fund austerity and  bailouts
  • National sovereignty as centralized budgeting needed to ensure no future crises

The EU remains the big threat; the global economy is still sliding. Within that context however, there were enough positives to feed the rally in risk assets to the upper edge of its 2+ month trading range. Using the S&P 500 as an example, that range has been between about 1100 to 1220-1250.

The big 3 market drivers over the past week were:

• Technical Resistance: Risk assets are now back at upper end of the trading range established since the big early August 16% drop. For example, the S&P 500 is now back around the top of its range around 1200. That 16% plunge in just 12 sessions from late July to early August was driven mostly by the advent of haircuts for GIIPS bond holders and all that this implied (more on that below). The US budget ceiling debate and resulting credit downgrade didn’t help, but the disappearance of this issue for now hasn’t helped markets to recover, so it wasn’t really a decisive issue. See Part 2 for details.

Markets haven’t gone below the 1100 low of this range because the other two main bearish drivers remain in place but haven’t worsened. In case you’ve forgotten, these are:

• The EU Crisis Optimism (Justified?): Talk about plans to resolve the EU crisis, while only talk at this point and lacking details, were enough of an excuse to for markets to continue to rally back up to the upper end of their highs for the trading range that’s been in place since August. We really question the justification of this optimism. We’ve seen so many short term rallies based on nothing but plans without details or funding commitments. The bottom line is that to survive, the EU has to commit to a combination of more austerity, bailouts, and loss of national sovereignty as budgeting becomes centralized in order to avoid future crises. We’re not convinced the will exists to bear this much pain.

• Upbeat Data: While China’s trade data was poor, its inflation data was better and US retail spending also gave cause for optimism as it confirmed the message of last week’s monthly jobs reports that the US economy isn’t collapsing. It may not be growing much, but it’s holding steady for now.

Note: Earnings thus far were irrelevant. Markets rallied even while earnings disappointed, because of positive news out of the EU discussed below. Google’s earnings beat was at best a contributing factor to a rally fueled by EU optimism and a US retail sales beat that confirmed the picture painted by last week’s US jobs reports: that the US economy isn’t as bad as feared at this time.

In the end, no real change in the situation. EU crisis remains a dire threat without a solution, and it’s occurring within the context global slowdown too. Within that dour picture though, the week’s news was more positive than negative, and at least justified the trip back to the upper end of the trading range in place since August. The EU is the big driver but so far we’ve just got more hot air, plans to make plans. That’s still some progress, but nothing to justify a real break higher yet. Thus we remain within at the upper end of the trading range.

1. EU Sentiment Was The Main Market Driver    

Once again, markets moved primarily with sentiment on the EU crisis. This came in 3 variations this past week.

Mostly there was greater hope that there would be a solid plan to support EU banking so that it could survive Greek and other sovereign defaults  (partial or total) likely to follow. If that can happen before the defaults/restructures/haircuts start, another Lehman moment with untold consequences may be avoided or minimized. The alternative, an EU and likely much wider banking collapse, sounds so very, well, 1930s.  Supporting these hopes

The big news supporting this hope for a plan to keep EU banking afloat came on a report Monday when German Chancellor Angela Merkel and French President Nicolas Sarkozy to unveil a solution to the Euro-zone debt crisis by the end of the month.

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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?