Or, Of Orderly Default, Central Bank Strategy & Other Oxymorons
Part 1: Prior Week Market Movers & Their Lessons For the Coming Week
The following is a weekly strategy guide, covering prior week’s market movers and their lessons for the coming week for traders & investors 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, & (in Part 2) a look at likely coming week market movers
- Technical Picture
- Fundamental Picture
- Lessons & Ramifications: Don’t be surprised by a risk rally
For the big picture for risk assets we turn to the weekly S&P 500 chart.
S&P 500 WEEKLY CHART 23 JAN SEPT 18 2011 COURTESY ANYOPTION.COM 03 sept 24 23.15
Technical points to note
- Past 7 weeks show firm resistance @ 1200
- An almost bearish engulfing candle this week
- 10 EMA already crossed under 20 and 50 EMA, 20 EMA crosses below 50 EMA
- Worse, index now spending 7th of 8 weeks below its 200 WEEK EMA, and the one exception was a minor breach above 2 weeks ago on rally founded on nothing but faith and hope (see here for details). The index may soon close its first Month below the 200 MONTH EMA, a further bearish signal for the longer term.
- For all the drama of the past week, we’re still very much in a range bound market for the past 7 weeks, awaiting new fuel from fundamentals. As we discuss below, while over the longer term their bearish, we wouldn’t be surprised if next week were stable or saw a bit of a rally back to the upper end of this 7 week range.
Key takeaway: more long term technical breakdown likely in the coming months.
On daily chart:
S&P 500 DAILY CHART 04 SEPT 2321
It was straight down & down hard, most notably -3.16 % Wednesday and -3.2% Thursday (its biggest 2 day drop in years), with an essentially flat close Friday on a bit of short covering ahead of the G20 results.
The index accurately reflected the flight to safety, which was so strong that at times even the EUR was up vs. perceived riskier currencies, despite the dire EU situation, merely because the EUR was lower down on the risk spectrum than the AUD, NZD and CAD.
EUR VS AUD, NZD, AND CAD 02 SEP 23 1057
The EUR was also moderately higher against GBP but only due to new BoE dovishness, and against CHF, but only due to SNB intervention. The EUR was down hard against the other safer havens, the USD and JPY. JPY strongest currency this week, followed by USD, suggesting a straight flight to safety move (and that markets are still not too concerned about coming US budget battle and potential government shutdown.
That’s somewhat understandable. Congress can avoid any trouble for now if it chooses to do so. Events are still well within the America’s control as long as its politicians behave and act responsibly. However for the EU, events are moving beyond their control as the crisis in confidence has clearly spread to the EU banking system itself because it’s so loaded with bad GIIPS bonds. Major money center banks in France and elsewhere are in trouble, facing lack of funding as the world shuns them as too risky given that Greece and others are expected to default, hence credit rating downgrades too. US and Asian banks were already known to have cut way back on lending to EU banks, now so has China.
Despite EU debt troubles and what looks like yet another US budget political battle & crisis, (both EU and US troubles should be great for gold) gold dropped hard on what appears to be a combination of profit taking to raise cash needed to cover losing positions, a normal technical pullback after its recent moon shot higher in August, and a sheer drive for greater liquidity.
So What Was Behind The Panic Last Week?
Here’s the quick view.Technical Resistance
Yes, that’s not a fundamental factor, but it needs to be mentioned here. First, after last week’s rally in risk assets on nothing but faith, hope, and charity , they were back up against near term resistance. For example the S&P 500 opened the week back near the 1220 level, which has held firm since the beginning of August. So for markets to advance, they’d have to see some substantial fundamental evidence in order to progress. Thus they were primed and ready to plunge when they got the opposite.
EU: Doing Another Greek Freak & More
As always, the EU sovereign debt and banking crisis was key, with markets rallying at times early in the week on news of progress with the Troika-Greece negotiations. Then on Tuesday an early rally based on this optimism faded on news that there’s still no deal, the Troika may not return to Greece until mid-October (which is right before Greece runs out of cash to make bond payments). Adding to EU fears:
- Reports that a Slovenian government collapse could delay the next bailout also helped stop that rally.
- S&P downgraded Italy’s credit rating from A+ to A with a negative outlook, that is, more downgrades could come if things don’t improve. Italian bond yields rose, making further borrowing more costly.
- The Bank of China stopped foreign exchange swaps with European banks due to fears that these banks could become insolvent from possible coming GIIPS bond default losses. The recent Moody’s downgrade of Societe Generale, Credit Agricole and BNP Paribas also contributed to China’s decision.
- A Spanish bond auction of 12 and 18 month treasury bills saw yields soar higher than just a month before.
While Greece may be the central item again, its default is already mostly assumed. It’s the ramifications of that default for the EU banking system and for other GIIPS block members’ ability to borrow that is now the bigger concern. But it’s no longer just about the EU.
The big dive Wednesday (2.5-3% plunges for most indexes)and Thursday (3-5%) was driven by the following.
US Stimulus & Bernanke Douse Market Hopes
On Wednesday the much awaited Fed stimulus plan, Operation Twist, was seen as inadequate and a signal to the markets that they could not expect enough help from the fed to keep risk asset prices aloft like with QE 2 last fall. Bernanke also issued a significant warning on the economy . Fed stimulus was what kept risk assets rising from the fall of 2010 into the spring of 2011, they certainly weren’t rising due to a deteriorating global growth outlook, which is the normal and legitimate justification for a rising market. Now markets were being told they’re mostly on their own. With the stimulus crutch gone, markets dropped hard. Asia missed the news and was mostly up Wednesday, European stock indexes dropped 1.5-2.5% in anticipation of this announcement, and the US fell similarly after it, with the S&P 500 down over 3%. The realization that there was no major Fed help coming continued to weigh on markets Thursday, especially in Asia, which was catching up to the bummer Fed announcement.
More Evidence Of Global Slowdown
The HSBC Preliminary China PMI fell hard from 49.9 in August to 49.4 in September, renewing fears that the world’s premier growth engine is slowing and cannot be expected to fill in the gap left by the sputtering US, Japanese, and European economies. This added to concerns about China after a series of negative reports out Tuesday, one from investor Jim Chanos of a real estate collapse having started, and another about the weakening of the Chinese banking sector on soaring bad debt rates.
In addition to the above woes of Greece, Italy, Spain, and EU banking:.....
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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 WERE SURE WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?