Fundamental Mom...'s  Instablog

               The market finished down on Friday after a weak jobs report, bringing the S&P 500 to its 5th straight week of losses. The flight to safety continued as yields on the U.S. 10 year hovered near the 3% mark. Apparently bond traders have had a much better grip on the poor economic data than most others at this point.
               An apparent solution to the Greece debt issues has been rumored, causing a sharp surge in the Euro while the dollar seems to be returning to its downtrend. We thought the dollar’s reversal upward was a significant trend reversal but this hypothesis is now being challenged with the move last week. Unlike the past moves down in the dollar index, the stock market is now moving down also, a break in the inverse relationship of the past and this should be noted.
                We see the market entering the week in a precarious position and the coming end to QE2 won’t help matters. There was a news report over the weekend of China selling a majority of their holdings in U.S. short-term t-bills (cnsnews.com/news/article/china-has-dives...), a big problem for the U.S. as it faces its debt issues. We suspect that the Federal Reserve has been aware of these moves by China and it may have helped to prompt QE2, an attempt to cover up weakness in the treasury market. Only time will tell if this thesis is true or not.
                The coming week has a light calendar of economic data highlighted by weekly initial claims and the Trade Balance data. The market will focus on headlines out of Europe and the Middle East, including an OPEC meeting that could have ramifications for oil prices. Although early yet, an unforeseen pre-announcement of earnings guidance by a U.S. corporation could add to an already unstable market.
                Predicting the market is not an easy thing, but given how long it has been since a 10% correction in the market, there is a high probability that this correction will accomplish that feat. If the data were to stabilize here and earnings continue to be strong, the correction could be the pause that refreshes the overall trend in the market since the 2009 bottom. The summer tends to have a slower trading pace as vacation time kicks in and this fact will increase volatility, especially in times of turmoil. 
                We remain defensive (twm, sds) entering the week. Calling bottoms can be a perilous task and markets tend to move a lot further in either direction than seems possible.  We are waiting for the market to tell us that we should be more fully invested and we will not try to guess when that moment arrives.