BIWEEKLY GLOBAL MARKETS REVIEW/PREVIEW: AWAITING PULLBACK,WHY, & TRADE IDEAS

 Review of December 26, 2010 – January 7, 2011, Preview of Likely Market Movers for January 10 – 21, 2011

 

A picture is worth a thousand words, so here is a chart of the bellwether S&P 500, our favorite single picture of how most risk assets have performed over the past 2 weeks. Activity for the period covered from December 26^th 2011 – January 10 is shown to the right of the vertical white line. We include the rest just for a sense of context.

 

S&P 500 DAILY CHART: Upward drift continues on bullishness about 2011 despite deteriorating EU Sovereign Debt and Banking Crisis, Austerity Spending Cuts In The EU and US, and Likely Slowing Growth In China From Monetary Tightening

01jan11 10 L

 

Here’s a quick summary of what was behind the moves.

Quiet low volume, low news trade into the final week of 2010 and first week of 2011 allows overall bullish sentiment, Fed QE cash, and year end fund positioning to push markets slowly  higher

• More EU Trouble, Including
  • Spiking PIIGS bond rates
  • Swiss National Bank refuses to accept Irish, then also Portuguese bonds as collateral for money market operations
  • Warnings of credit downgrades and actual downgrades
  • Germany and France reportedly are pushing Portugal to accept a bailout as Portuguese 10-year bond yields rise over 7%, the supposed red line at which Portugal can no longer afford to access credit markets.
  • Portugal, Spain, and Italy all selling more bonds this week despite spiking rates.
  • Warnings of a US state and city debt crisis to hit mid-2011 (barring another bailout)
  • Threats of war on the Korean Peninsula.
• Bright Spots In The News Included:
  • Overall continued good data out of the US that confirms the slow but steady recovery story, except for a mildly disappointing December jobs report
  • Optimism on the coming US 2010 Q4 earnings season, which began with a better than expected result from Alcoa (AA), the traditional first big name to report.  Later this week we get Intel (INTC) and JPMorgan-Chase (JPM). Thus we get a quick first look at leaders in materials, tech, and banking.

COMING WEEKS’ LIKELY MARKET DRIVERS:

• PIIGS bond sales, yields, and ECB moves to prop up confidence, both buying these bonds and verbal support.

Expect encouraging words and some token buying from China too. China has already said it would buy $6 bln in Spanish bonds. However markets were unimpressed, given that Spain’s national debt alone (forget regional and city debt) is about $45 bln.

• US Earnings Season Results: We get a good sampling in the first two weeks, which sets the tone and generally provides most of the market moving that will come from the earnings season reports.
• Key Calendar Events: For details see: Key Market Movers This Week: EU Anxiety, Earnings Season Begins

So Cliff, What Trades Are You Looking At?

Risk assets are at multi-year highs, most of the anticipated good news ahead seems priced in, and there’s lots of potential from the EU, China, and US for disappointment.  On the other hand, a good earnings season could fuel markets higher as long as the EU doesn’t have a major blowup. In sum, I’m bearish for the coming weeks but not opening bearish trades until I see a reversal start. Markets have been resilient and the Fed is not shy about intervening, so I’m not planning major bearish positions until trends reverse lower and I get technical confirmation.

The big exception, as I note in the disclosure, is that I’ve been short the EUR for a while, and it breached support Friday. PIIGS Bond auction results, yields, and ECB moves to revive confidence will determine how much lower the EUR will drop.

 

 

Some Charts To Watch:

S&P 500 Daily Chart: Last week the index breached the 1265, continuing to hit new multiyear highs. Other risk assets also continue to hover near or above similar levels. Use this chart as your summary of market risk appetite.

EURUSD Daily Chart:  The weekly chart below of the EURUSD shows continued deterioration and has now breached key support, suggesting more downside ahead in the coming weeks, barring some dramatic new developments to prop up confidence in the PIIGS.

 

 

WEEKLY EURUSD CHART   02jan11 11 L

Note that on Friday January 7^th, the EURUSD decisively broke through:

• The 5-month support level of 1.300
• Both its 20 and 50 day SMA
• Its 50% Fibonacci retracement level dating back to its multi-year low of 1.1940 of early June 2010. In other words, the pair has lost over half its gains since the height of the Greek bailout crisis before the EU/IMG €750 bln rescue plan hit. 

 

Goodbye & Thank You

This is my last post as Chief Analyst of Avafx, as I’m taking a new position elsewhere. It’s been a privilege to serve you.  

You can continue to follow my posts on www.seekingalpha.com, www.forexfactory.com, and other sites where I appear. My profile page on these sites will indicate my new location for those wanting to catch all posts.

Good luck for the coming week, Cliff Wachtel, Chief Analyst, Avafx.

For my comparison of bullish and bearish forces pulling at markets, see: BULLISH AND BEARISH THEMES GOING FORWARD INTO 2011: BEARISH FUNDAMENTALS VS BULLISH INTERVENTION

 

DISCLOSURE & DISCLAIMER: AUTHOR IS SHORT THE EUR, LONG THE CAD, AUD AND USD, LONG SELECTED EQUITIES HELD AS LONG TERM INCOME/GROWTH INVESTMENTS, SHORT THE OVERALL STOCK MARKET FOR HIS PERSONAL PORTFOLIO. THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER