Saturday, August 6, 2011

Market Thoughts for Week of Aug 8

1. S&P's US debt downgrade finally came. I say it has now been more than priced in. Market is a discounting mechanism. This trade has been on since smaller than $4T deal was reached. Market is down 14% from just a month ago (thought #2). Sell on rumor buy on news. Market will forget about this in a day. TV heads will not :)

2. Market is down 14% from the top on July 7. I actually count intraday low of Fri on this calculation. So let's play with numbers, because I have a good comparison. In 2010 SPX was down 14% on 5/25 from top on 4/26. One month and 14%, coincidence? Hardly, and here is why. Just like this time, there were worries about new recession (thought #3), end of QE1, and European debt crisis. Sounds familiar? We have recession worries, end of QE2, and European debt crisis now (thought #5). Two differences now are US debt drama, and blockbuster earnings - they cancel each other out, as I said in my previous week thoughts.
One month later, in June of 2010, SPX retraced back 50% of the loss. Let's see where we are on Sep 5 2011. 50% retracement would be 1260, which also happens to be former support (now resistance), and flat on the year.

3. After Friday's NFP one has to think about how we are going to have a recession with these numbers. Just not adding up yet, folks. I will not go into deep details, as they are available on BLS's website. All I will say is we are in slow growth and not a recession yet. Let's watch the econodata for further deterioration before we proclaim the R word for good. And let's not forget FED (thought #4), they will not stand by, they have been trigger finger itchy all the way.

4. FED meeting on Tuesday is very important. This is the meeting in which they can further tweak the language to hint about QE direction. I really think that after NFP on Friday they can wait for another jobs report before deciding on QE3. So maybe they hint us on QELite this time, as they decide to reinvest interest on their current portfolio. Not a bad thing folks! They need to stop the market rout which may tip the economy into recession. Commodity prices are way down, and no signs of inflation anywhere now (per latest PCE data). Food and gas costs are down. Please do not listen to TV screaming heads that we are heading for inflation disaster, we still have deflation, we really do. The biggest asset we own - house is still declining in price.

5. Europe may be the most important theme next week. Italy and Spain may decide that austerity will be accelerated. While this does not bode well for their economies in the short run, it will let ECB buy their bonds (as early as next week), and calm down the whole contagion fear. I say this is the real deal folks!!

6. Be ready for more volatility but do not overreact on both sides. I do not think we are heading down much more than 1130 on SPX. At the same time 1260 is now a pretty tight lid on the upside. New trading range??

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