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Thoughts on the Big Picture and 08/02/11 Market Action

|Includes: SPDR S&P 500 Trust ETF (SPY)

The SPY (see above chart) closed below the lower end of the trading range. I prefer to trade swing trades to the long side and right now this is not the environment for high probability long side swing trades. I feel going short here also poses some risks after a huge move down over the last several trading days.  It is possible we could see a bounce here, but even if we did right now I am not seeing any evidence that it might be anything more than a very short term rally on the SPY. Bounce type trades are not the types of trades I like, so I feel comfortable in a mostly cash position. I am going to have to see some more evidence for improvement in the price action and given the magnitude of the selling and this news driven market environment I feel like that could still take some time. It is hard for traders to be patient sometime, but that probably would be the right thing to do for me (given the trading style I am comfortable with).

One would have thought that the debt ceiling deal may have brought some stability to the markets, but no signs of that as of now. It will be interesting to what the market does over the next few days as we put news of the debt ceiling in the rear view mirror. My personal thoughts on the debt ceiling is that it has not really solved any of the country's longer term economic problems. Every time we hit the self imposed debt ceiling the government raises the ceiling and talks about spending cuts and this has been going on for decades. This will continue as long as the prevailing philosophy in Washington is that consumption (spending) is the driver of economic growth.  I think what we need more of is savings (the difference between production and consumption). Efficient production allows for the building up of savings and this is a creative and organic process. No amount of printing up of dollars or borrowing ( which means you have to consume less in the future) is going to grow our economy (increase our production) and increase our savings (the capital needed to grow the economy).    This brings me to the chart above. So far the price of gold is not showing confidence that the debt ceiling agreement is a real long term solution. Gold is trading around 1660 and ounce and I am going to be watching it closely to see if can hold the 1600 $/oz level.

For those that are interested here is an article that Peter Schiff wrote about the debt ceiling:

Rahul Parikh