That sure was some kind of volatile week!
Even an old grizzled and bullet riddled veteran of the trading trenches like myself was impressed with those/these incredible trading swings. I have been on record expecting a 'potential' summer breakout on the upside. The free falling 2,000 DJIA point market sell off/rout in only 10 trading days suggests that I might have been a 'tad' over exuberant and dead wrong. You sure didn't need to go to the beach to get sun burned this summer! And sun screen was no protection from the trading screens!
As the market rolled over I did not like seeing the DJIA breaking it's 200 dma (12,300) and was especially concerned once the 12,000 'oversold' support level (50-200dma death cross level) was violated like a hot knife through butter. Wild and wooly volatile trading whipsaws have ensued since the DJIA touched a 10,600 inter day low 4 days ago. VIX volatility (short term coincident sentiment indicator) has exploded (tripling) into panic readings which is never a great sign. Hopefully Washington 'gets' that a global financial system which is 'rigged' with $US700 trillion in derivative time bombs tends to get a bit jumpy in uncertain circumstances. Why and what leaders say is very important and potentially lethal! Hoping the political types both understand the problem(s) AND have an effective long term solution might be too much to ask for. It looks like any major policy direction will now be in the hands of a newly appointed yet-to-be-named super congressional committee sometime by the end of the year. Let's hope that the new divinely inspired 12 wise men/women have a workable plan that satisfies the needs of the economy first and foremost.
These wild global price swings were first ignited by last Friday's S&P US treasury downgrade - and then further exacerbated by the Fed FOMC unprecedented/desperate statement of a/the continued two year 'guaranteed' zero interest rate policy. Three Fed officials dissented their approval of this controversial strategy which has raised a few eyebrows. For those who need income (fixed incomers, insurance companies, pension funds etc) the return on a $US100,000 Tbill is now a paltry 0.11% or $110 per year - less taxes! Those that can do something about bloated consumer and government debt levels and serious structural domestic economic concerns are obviously unwilling to step up to the plate. Interest rates have been very accommodate (easy) for 56 months (below 2%) and effectively an unhealthy zero% (free) for the last 32 months. The 'free debt' message which has been sent and enjoyed contrary to Fed thinking is unsustainable and will be very difficult and exceedingly painful to reverse. Taking candy from this baby will not be easy. The sugar withdrawal will be palpable.
The latest multi-decade abysmally low U of Michigan consumer confidence stats for the month of August (54.9%) suggests that tax payers, consumers, Fed leadership, and various levels of government leadership are not on the same economic page - or perhaps the same planet!
As bad as the US public debt scene seems - European concerns are even worse. Cellphone carrying social media quasi-thugs are reigning pre-austerity economic terrorism on the streets of England. Rouge gangs of idle youth have collectively decided upon a strategy of smashing windows and stealing goods as an efficient way for those that 'have' to pay their 'fair share!' Evidently 'hot' Michael Kors watches are the street's response to quantitative statutory budget restraint. The Greeks have thumbed their collective crooked Mediterranean noses up at monetary restraint and fiscal discipline announcing yet further accelerating deficits. Germany is now the last solvent man standing and the ultimate back stop at what is a very fragile bond house of cards. Germany did not participate in the last decade orgy of leverage and reckless spending. They have the 'uncommon' developed economy DNA of industry, investment, hard work, and balanced books. Their thing is to innovate, improve, engineer, and pay their bills. Can you imagine? They are the only country to hold their original allotment of 3,400 tons of gold they received in the late 1940's. The only mistake they did make was to lend to the 'common' levered free spending and free loading spending jurisdictions of the EU and USA. Germany has also lent hundreds of billions of Euros to a variety of banks since the beginning of the financial crisis accepting such dubious collateral as Greek bonds in return. They made the fatal/incorrect assumption they were actually going to be paid back. They Deutschlanders believe in rules, regulation, and character. A move to default the conspicuous consuming nations essentially vaporizes most, if not all, continental banks worth mentioning. Chancellor Angela Merkel will have to pull an elephant out of her hat in order to persuade her constituents that further lending and support to EU welfare state members is in their best interest. The question now is how many holes can they plug and how much of Europe do they want to own? On the plus side Spanish and Italian yields have contracted to a more reasonable and manageable 5% level and France has maintained it's 'AAA' rating for the time being.
Stay tuned as key developments are unfolding on an hourly basis. Anything can and will probably will happen!
In the US, improving unemployment stats and a slowly improving economy is being systematically undermined by financial turmoil and ongoing uncertainty. Broad indexes have pretty well wiped out any of the positive effect/gain from the various quantitative easing's since 2009. The S&P imploded to the 1070 level in very dramatic programmed algorithmic driven liquidation. Despite the recent outstanding earnings season and fetching corporate valuations the concern of 'unstimulated' earnings contraction prevails. Bank of American has become the poster child for all the is 'unwell' in the residential mortgage and financial balance sheet world. Despite bloated cash levels BAC came within a toonie of it's March 2009 hysterical and historic low. Most broad major indexes have cleanly and clearly broken down from what is now a huge overhead distribution top. Major markets have peeled almost 20 percent off their exuberant April highs in 'pre-recessionary' selling. The prevailing view is that very attractively valued equities are getting risky and vulnerable in a contracting economic environment. The long term zero interest rate policy effect appears to have been fully discounted in stock prices. A concerted downside break below the magical and mystical DJIA 10,000 and S&P 1,000 levels would be a potentially paralytical event. At this point I'm not sure whether that will or will not happen. 12,000 on the DJIA and 1,250 on the S&P now represent considerable overhead resistance. Interestingly in this incredible volatile week US major market indexes will be closing down 1% or less - despite feeling much worse.
In commodities, the standout was the US treasury futures. Despite the 'downgrade' US treasuries rocketed into nose bleed territory with all time low yield levels. This counterintutive move may be as much of recessionary indictment as a safe heaven maneuver. Short term auctions continue to be well received but yesterday's 30 yield T Bond auction was met with stiff resistance. My opinion is that the US Treasury sector is anything but a safe heaven - and is very vulnerable to a dramatic longer term trend reversal despite the liquidity which it offers. The Euro vs US$ has been remarkably 'unvolatile' during this contractionary period. Resource sensitive Aussie and Canuck currencies bore the brunt of the widespread liquidation down to longer term support levels. The 'anticipated' CME Gold margin increase (22%) quickly reversed $1,800+/oz prices. Gold looks like it can easily correct to the $US1,650 level but remains hostage to the whims and political interference of the CME. Silver continues to consolidate the seven March 2011 CME margin increases in the $US38-42/oz range. Significant moving average convergence suggests a 15% move in the near term - which way I'm not sure. Copper has dropped 10% during the past 10 trading sessions consolidating slightly above $US4/lb. Slowing economies could see Copper selling into the $US3.50 level and longer term support. Crude Oil was walloped almost 25% from the $US100 level of two weeks ago. The $75-80 level represents substantial long term support levels despite slowing growth. Agra markets are mixed to positive based on bullish crop reports and growing demand. Corn has been the leader of the pack making life of the contract highs above $US7/bu.
In Canada, the S&P/TSX experienced heavy initial selling led by the energy, material, and financial sector. Surprisingly the TSX Index will close up about 3% this week only because of the heavy pre-downgrade selling which occurred over the past 10 days - and since the end of February. The top performing sectors were the defensive health care group (6.2%) and the oversold materials sector (5.7%). Tech (.94%) and consumer discretionary (.52%) sectors fared the worst. Housing starts are extending their July uptrend (as usual) although a disappointing trade deficit number was registered for the month of June primarily because of relatively currency strength. On the TSX 13,000 now represents substantial over head resistance and 11,000 substantial long term support. The under performing gold equity sector is finally showing considerable relative strength and a potential bottoming process. The junior resource index TSX-Venture hit an astonishing low of 1,700 in this selloff. The heavily oversold energy group is also looking interesting and a potential meaningful contra down trend rally.
Bottom Line, based on the significant technical damage inflicted on the major indexes I prefer a more neutral hands-in-the-pockets sideline stance. Despite the almost 'too many' compelling valuations and very attractive fundamentals I must defer to chart and market action which is confusing to say the least. An austere 'Fed-less' supported US economy will be challenged to maintain growth and profitability. The S&P downgrade is a warning shot that I prefer not to ignore. At minimum a substantial amount of price consolidation is necessary to repair the technical and psychological damage done. All attention will now be drawn to potential economic 'shock and awe' at the upcoming Jackson (Black) Hole meeting at the end of the month.
It will be interesting to see how the equity markets reacts to a series of sustained period of positive macro economic developments - if and when they occur!
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