by John Nyaradi
For many months, we have heard reassurances, platitudes and promises from Greece and its partners in Europe while many prominent analysts have been saying all along that the eurozone was engaged in a losing exercise of “kicking the can down the road.”
Now, it seems that perhaps we have reached the end of the road. If that is the case, the ramifications will be immense, for not only Europe but the whole world.
At Wall Street Sector Selector, we had a nice week as our defensive posture generated gains in most positions. There is still hope for the bulls, as we’ll discuss in a moment, however, we remain positioned in inverse ETF and put option positions, continuing to expect lower prices ahead.
On My Wall Street Radar
Chart courtesy of stockcharts.com
In the point and figure chart of the S&P 500 (SPY) you can see that the technical picture isn’t pretty. Click to enlarge.
The P&F pattern is in a column of “Os,” indicating that supply is in control of the market and exerting downward pricing pressure.
We currently sit at a key support level, a point that would be a major breakdown if violated, particularly the blue bullish support line which is currently bending under current selling pressure. These blue lines tend to act like walls and indicate long term trends; once broken, they are very difficult to reclaim.
Below today’s level lies the 1100 zone, the recent lows, which is the last line of defense before what could then be an uncontained drop to 1020-1040.
The good news for the bulls is that these levels haven’t been broken yet in spite of several tests and the unrelenting barrage of terrible economic news. It’s likely that we’ll see another retest of that range as we move farther into scary September and the outcome of this battle will prove critical for future direction of global stock markets.
The Economic View from 35,000 Feet
The economic news could hardly have been worse last week, both at home and abroad.
Europe and Greece certainly dominated the landscape with a near non-stop flow of what could only be described as shocking developments.
The G-7 had a big pow-wow in Marseilles and said not to worry, but came up with no specific answers to the regoins problems.
European Central Bank top dog Juergen Stark resigned which stunned the markets as internal disagreement over the future course of their bond buying program bubbled to the surface.
More troubling, reports came out of Germany that the country was preparing contingency plans to recapitalize German banks in the event of a Greek default as these institutions could take as much as a 50% hit on their Greek bond holdings.
Greek bond yields have soared to record highs as have Greek Credit Default Swaps which now are priced at a greater than 90% probability of default. The euro didn’t like all of this action too much as it hit a six month low.
Today’s landscape looks more and more like what could be the uncontained crisis I’ve called Lehman 2.0.
Of course, our markets at home couldn’t ignore all of this action and declined for the sixth week out of seven. Not even President Obama could stop the slide as he unveiled a $447 billion jobs program that could add as much as 2% to GDP if he can get it by the Tea Party U.S. Congress.
Down the street from Capitol Hill at the Federal Reserve, all hands wait for Dr. Bernanke to step up to the plate on September 21st. (This could be a disappointing “at bat” for the Fed as Dr. Bernanke further saddened market participants this week with no concrete proposals in what seems like is now a weekly speaking engagement.)
Last, but certainly not least, the flight to safety continued with 10 Year Treasuries hitting record low yields, gold oscillating wildly and the U.S. dollar staging a meteoric breakout to the upside. Click to enlarge:
chart courtesy of stockcharts.com
What It All Means for Stock Market and ETF Investors
What it all means is pretty simple. We find ourselves in an increasingly dangerous world based on technical indicators, fundamentals, macro economic conditions and growing systemic risk.
Policymakers in Europe seem to have lost control of their crisis. If they don’t get out in front of that very quickly, Greece could fall and set off a tidal wave that could swiftly sweep up major countries like Ireland, Portugal, Italy and even Spain. Swept along with the sovereigns would be the major international banks that hold their debt, and all of that put together would create a ripe environment for nothing short of a global financial panic.
On the home front, everyone is hoping for Dr. Bernanke to pull a rabbit out of his hat, but if he had any rabbits left, he already would have magically conjured them to stage center. Probably the best we can hope for here is “Operation Twist,” wherein the Fed tries to force down already historically low long term interest rates that have generated precious little demand and fewer jobs. (The vision of Dr. Bernanke doing a version of Chubby Checker and the twist is a truly horrifying apparition.)
Finally, President Obama’s jobs program has some hope, 2% GDP growth is not a bad thing, but it pales considerably when put next to coming deficit reduction proposals and the growing likelihood of a double dip recession which could easily zero out the positive effects of another half trillion dollars of Federal stimulus.
So today we find ourselves perhaps nearing the end of the road with no more tarmac remaining for kicking the can somewhere into the hazy future.
At Wall Street Sector Selector, we remain defensive and expect the current downtrend to continue over the intermediate term.
The Business and Financial News Week Ahead
Significant Upcoming Economic Reports and Activity
Wednesday will give us a look at the state of the consumer with the retail sales report and Thursday will be the big day this week.
Tuesday: August Import Prices, August Federal Budget
Wednesday: August Retail Sales, August Producer Price Index
Thursday: Initial Unemployment Claims, Continuing Claims, September Empire State Index, August Industrial Production, August Capacity Utilization, September Philadelphia Fed.
Friday: Consumer Sentiment
Today, of course, is the 10th anniversary of 9/11 which is a day that none of us can ever forget. Please take a moment to remember in your own way our fellow countrymen who were lost on that day and their families whose lives were changed forever.
Disclaimer: Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.