Cliff Wachtel's  Instablog

Part 1 of Weekly Review/Preview: Prior Week Market Movers & Their Lessons For the Coming Week

The following is a weekly summary and 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.

Let's look at the past week's market movers on a day by day basis.

1. Monday: Market drop hard due to a combination of:

1. Bad data: weak EU and China Mfg PMIs, poor Spain GDP put it back into recession
2. Unsettling political developments: in Holland (government falls over austerity dispute) and France (victory by anti-austerity/EU fiscal pact candidate) drive markets lower.

2. Tuesday: Bond auctions of Spain, Holland not as bad as expected, meaning that markets were happy they there was demand, even if at the cost of continually rising bond yields. Continued overall good earnings results helped.

3. Wednesday: AAPL earnings and Fed keeping alive hope for QE 3 if needed, outweigh bad data (UK slips into recession, US durable goods missed forecasts badly).

4. Thursday: Most risk assets up as better than expected housing data overcame weak US weekly jobless claims and EZ economic confidence

5. Friday: Strong earnings from internet retailers Amazon and Expedia outweighed a weak US GDP report.

Here are the big take-away lessons of the past week.

We may continue riding this rally but we don't trust it. Here's why.

Risk assets are up, with the bellwether S&P 500 up 1.8%, and just over 11% under its pre-crisis 2007 highs. This is remarkable considering that the data this week was mostly bad, highlights include:

• Poor PMIs in China and Europe as both economies continue to weaken
• Mostly weak US data including jobless claims, a huge miss in durable goods, and weakening GDP
• Spain and the UK slip back into recession
• EU crisis continues its slow deterioration as Spanish and other EU bond yields continue higher

In other words, every big economy looked flat to worse this week, yet risk assets rose nonetheless.

So what's keeping markets aloft? We're read the bullish arguments but they leave us unconvinced.

Over the past week the likely cause is a combination of low expectations and hope. More specifically:

• Earnings: Of the 287 S&P 500 firms that have reported thus far in Q1 2012 earnings season so far, about 73% have topped estimates. Despite the fact that everyone knows these estimates are kept low in order to facilitate earnings beats, markets chose to take them at face value. In addition, forward guidance is also beating low expectations, though with employment and wage growth in the developed world weak, we continue to wonder how that can continue.

• Markets ignore rising bond yields in Europe, the classic warning sign of more EU angst coming, and were happy that Spanish and Dutch bonds sold at all.

• Both US and Japanese central banks keep hopes for more stimulus fed rallies alive.

In trying to explain the rally over the past months, we have to look deeper.

The global economy does not look nearly as good as it did just before the financial crisis hit in late 2007, yet most risk assets, as represented by major stock indexes, are priced almost as high.

Frankly we're a bit baffled. We can only speculate that the cause of the rally is a combination of

• Ongoing stimulus (and hopes for more) that keeps cash coming
• Low rates that encourage deploying that cash into stocks and other risk assets rather than bonds

The selloff in the USDJPY despite the "risk-on" mood suggests markets are anticipating QE 3. We suspect this is hope is premature. The US economy is struggling but the Fed has indicated it won't deploy a new stimulus package unless things get much worse. For now, however, the US is muddling through, not in crisis. Jobs growth and spending are not collapsing, and GDP is still growing.

Expect earnings to start losing their impact now that the third full week of earnings season is over. See Part 2, on coming week market movers, for what's likely to be driving markets next week. Here's a sneak preview.

The unifying theme behind the Monday fall of the Dutch government and French Presidential election results was the EU's Fiscal Pact. Hollande won in France on an anti-austerity, anti-Fiscal Pact stance, and the Dutch government fell because the coalition could not agree on how to reduce the fiscal deficit to 3% of GDP next year. Add to the above that Spain is now back in recession, and the comments coming out of the ECB meeting for clues about what action its considering become potentially very important. As suggested last week ECB President Mario Draghi, the EU desperately needs a growth pact to serve as a carrot to balance the Fiscal (read: more austerity) Pact's stick. Unless the EU can offer the GIIPS some genuine help in getting GDP up, they may resist taking further steps to get debt down. In other words, if the EU can't offer the GIIPS growth to ease the pain of austerity, the economic health of the EU will continue to deteriorate This past week George Soros suggested that the EU risks a Soviet Union style collapse from the deep social, economic, and moral crisis it's now facing.

One of the repeating themes we see above is that in the EU, US, Japan etc, the risk is high for more central bank policies that should bring a long term loss of purchasing power in these currencies.

To protect yourself against the risk of crashing markets and currencies dragging you down with them, the best help I can offer you is, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It's the first forex book ever published to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns. See my profile page or the above link for details.

The best way to fight central bank anti-saver policies is vote with your feet and move into assets denominated in currencies of fiscally responsible nations.

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?