I doubt anyone has a sure answer on this. Rating agencies will get harassed by US gov't (if they haven't already) if downgrade comes. I think that it will mark the beginning of the end for those who will downgrade US (but I really do not care).
We are to be prepared for the downgrade nonetheless. Let's go over the scenarios if it comes.
1. End of rally for equities I say. It will create an unnecessary weight on equities. Many huge players will be scrambling to find a safe place to hide the funds coming out of AAA securities. Stocks are too vulnerable here for a safe bet. Sell first, ask questions later will be the name of the game. Risk off as soon as downgrade is announced.
2. Dollar takes a one-day hit but then turns around due to risk-off trade. It has to be a pretty huge move for equities to trigger a u-turn in DXY. So I say wait for a climax selling in stocks to develop, but I personally will be watching a test of 73.
3. Due to risk-off trade all risk currencies will get dumped. AUD, CAD, GBP, and EUR will get hit across the board (after initial one-day rally). JPY and CHF will shoot higher, not sure for how long, as SNB and BOJ will be looking to curb the rise somewhat.
4. Gold shoots higher and oil craters.
Gold goes opposite of risk lately, but really has its own bull mind developed. It just wants to rally on any occasion. Could there be a better one than US losing AAA debt rating? Raging bull...
Oil is a simple 100% correlation to SPX. So it will follow down without any hesitation.
Many will doubt my theory of gold and dollar going higher, but it can happen during turbulent financial market times.
UPDATE Aug 1 10:15 am
Wow, is this trade already on???
UPDATE #2, Aug 2 @ 8 pm
Fitch and Moody's (wisely) decided not to play with fire, and affirmed US AAA debt rating. They did warn that outlook is negative and downgrades could still happen, if economy slows down considerably and debt cuts are not enacted soon. This leaves S&P. I bet they are waiting for this market turbulence to stop first, so not to aggravate the issue at hand. They may downgrade US debt, once we have a rally.
UPDATE #3 Aug 5 @ 12:50 am
Now that we are 12.5% off the high on SPX, it will be interesting how the market reacts to a possible downgrade by S&P. It may actually rally, in sell the rumor buy the news effect.
Sunday, July 31, 2011
Futures Update Week of Aug 1 Sun Night Open
News of a deal is sending risk trade higher. Equity futures, commodities, and commodity-related currencies are all rallying. We have one possible negative: Mrs. Pelosi & Co., but I think she just wants her say in the thing, as well as some spotlight back (after losing House speaker title). Come Monday afternoon or night, we will have a deal, and signed by President debt ceiling raise. I predicted it all a month ago, a race to the wire, eleventh hour fight, but a final outcome just had to be a deal. I said that all of this would weigh on equities in July. We did not lose 777 Dow points in one day, but we lost 670 points since July 7. http://viewonmarkets.blogspot.com/2011/07/happy-independence-day-to-us-traders.html
Due to this circus in Washington, we now have a well-defined picture-perfect double top on Dow @ 12751 (on 7/21), which itself is a lower high compared to 5/2 high of 12876. This technical picture along with deteriorating economic conditions will put a question mark on a long-term rally. But rally nonetheless will happen, as we just broke out of a falling wedge on YM_F Dow futures I mentioned a few days ago http://viewonmarkets.blogspot.com/2011/07/spx-futures-technicals-esf.html. Give the rally a few days and about 350 points. Just to inflict maximum pain on shorts, longs may take the price above 50 dsma, but my view is the end comes at a 8/21/50 dema and 50% fib crossroads. Not a bad idea to be long to that point. Hey, all we traders do is ride the wave, after all. Trail your stops though, as u-turn could be fast and vicious.
Watch Chinese Mfg PMI report tonight. The only hope we have left is world economy rebounding, as ours is slowing down to a halt. Somehow I think that world economy is going to be a problem as well.
Update 1
Chinese Mfg PMI is out. Barely above 50. Saved by 0.7 of a point from contraction. Next important number is ISM Mfg PMI tomorrow morning.
Update 2
HSBC Chinese Mfg PMI out @ 49.3. Oops... Contraction is a number below 50.
Taiwan PMI out @ 46.1 - oops again.
Folks, are you getting the picture yet??
Due to this circus in Washington, we now have a well-defined picture-perfect double top on Dow @ 12751 (on 7/21), which itself is a lower high compared to 5/2 high of 12876. This technical picture along with deteriorating economic conditions will put a question mark on a long-term rally. But rally nonetheless will happen, as we just broke out of a falling wedge on YM_F Dow futures I mentioned a few days ago http://viewonmarkets.blogspot.com/2011/07/spx-futures-technicals-esf.html. Give the rally a few days and about 350 points. Just to inflict maximum pain on shorts, longs may take the price above 50 dsma, but my view is the end comes at a 8/21/50 dema and 50% fib crossroads. Not a bad idea to be long to that point. Hey, all we traders do is ride the wave, after all. Trail your stops though, as u-turn could be fast and vicious.
Watch Chinese Mfg PMI report tonight. The only hope we have left is world economy rebounding, as ours is slowing down to a halt. Somehow I think that world economy is going to be a problem as well.
Update 1
Chinese Mfg PMI is out. Barely above 50. Saved by 0.7 of a point from contraction. Next important number is ISM Mfg PMI tomorrow morning.
Update 2
HSBC Chinese Mfg PMI out @ 49.3. Oops... Contraction is a number below 50.
Taiwan PMI out @ 46.1 - oops again.
Folks, are you getting the picture yet??
Friday, July 29, 2011
Canada Economy
Totally lost in the shuffle today was the weak econodata from Canada. May GDP was negative 0.3% and mostly attributed to oil and gas industries' slowdown. I wrote a piece earlier discussing this phenomenon of Canada's economy direct correlation to oil and US economy http://viewonmarkets.blogspot.com/2011/06/oil-part-3.html
CAD dove on this news, and traders are now focused on rate hike being less likely. To make things even worse for those who expected a hike, this morning Canadian wholesale prices report showed a decline vs expected rise, and by a lot I would say. Bummer!!
Not a surprise folks. Mr. Carney's comments from June gave us the hint. Somehow we knew well in advance...
This development takes care of one of the closest stock market-correlated currencies. Plot CAD over SPX and you will see what I mean. This is a hint where SPX is heading.
Furthermore, it will help DXY to bottom.
CAD dove on this news, and traders are now focused on rate hike being less likely. To make things even worse for those who expected a hike, this morning Canadian wholesale prices report showed a decline vs expected rise, and by a lot I would say. Bummer!!
Not a surprise folks. Mr. Carney's comments from June gave us the hint. Somehow we knew well in advance...
This development takes care of one of the closest stock market-correlated currencies. Plot CAD over SPX and you will see what I mean. This is a hint where SPX is heading.
Furthermore, it will help DXY to bottom.
$TNX $ZN_F Update
When I posted on July 11 that TNX is heading to 2.5%, many probably thought that I lost my mind. http://viewonmarkets.blogspot.com/2011/07/10-yr-note-yield-tnx.html
Well, it now looks more likely, doesn't it?? We just closed at the lowest yield of 2011, right at 2.8% You can attribute this to debt ceiling, risk-off, and European worries, but I think the biggest factor contributing to 10 yr yield is our ailing economy. It is going to be very tough to get back above 3% meaningfully if we do not get economic reports to show that 2nd half recovery is starting. None of them showed it so far, so next week's reports are going to play a huge role. Watch the yield to crater down to 2.5% and then 2.3% in not too distant future, if poor news does not turn around fast.
Well, it now looks more likely, doesn't it?? We just closed at the lowest yield of 2011, right at 2.8% You can attribute this to debt ceiling, risk-off, and European worries, but I think the biggest factor contributing to 10 yr yield is our ailing economy. It is going to be very tough to get back above 3% meaningfully if we do not get economic reports to show that 2nd half recovery is starting. None of them showed it so far, so next week's reports are going to play a huge role. Watch the yield to crater down to 2.5% and then 2.3% in not too distant future, if poor news does not turn around fast.
$SPX Futures Technicals $ES_F
One can't miss the fact that falling wedge has developed on SPX $ES_F futures. For that matter on all of US Stock Index Futures as well - YM_F, NQ_F, TF_F. Falling wedge is a bullish reversal pattern.
So shorts are on notice here. No need to be a hero, you got a big chunk in the middle and it is time to be thinking to give longs a chance. This said, any meaningful bounces will be met with enormous selling by all of those who now realize that this sell-off is more about the economy and less about the debt ceiling. 50 dsma is a major resistance for now, with 150dsma just above there as well. If those are not enough, just 7 points above there is a laminate of 4 waiting for longs to be met - 8dema, 21dema, 50dema, 100dsma.
We have a golden opportunity to trade both sides for a while longer. Play the retracement, and then short them again.
Good Luck!!
So shorts are on notice here. No need to be a hero, you got a big chunk in the middle and it is time to be thinking to give longs a chance. This said, any meaningful bounces will be met with enormous selling by all of those who now realize that this sell-off is more about the economy and less about the debt ceiling. 50 dsma is a major resistance for now, with 150dsma just above there as well. If those are not enough, just 7 points above there is a laminate of 4 waiting for longs to be met - 8dema, 21dema, 50dema, 100dsma.
We have a golden opportunity to trade both sides for a while longer. Play the retracement, and then short them again.
Good Luck!!
Market Thoughts for Next Week
We are going to have a very busy week of August 1. A lot of econodata, earnings, and debt ceiling dilemma. My plan is to be flat until Sun night (start of forex and futures trading), and digest any possible developments out of Washington. Today is just too wild of a day to be chopping the trading account. I will say this again: nobody ever gets all the moves, except for liars.
So my very important message for next week is: ECONOMY. I am starting to think, no, I am already certain that we are heading for some extremely turbulent times in the market, due to bad economic news. 2nd half recovery is no sure thing now. We are going to have (starting with Chinese PMI on Sun night) very important economic news releases next week, which will culminate with NFP on Fri. I think that they will be more important than the debt ceiling. Funny how "it is" all about "the economy, stupid".
And why is the market not going up on better-than-expected Q2 earnings? All good corporate news have been cancelled by debt ceiling drama. So the weight of economic slowdown around the world has tipped the scale. Watch those reports next week for defining moment in the market's next move.
So my very important message for next week is: ECONOMY. I am starting to think, no, I am already certain that we are heading for some extremely turbulent times in the market, due to bad economic news. 2nd half recovery is no sure thing now. We are going to have (starting with Chinese PMI on Sun night) very important economic news releases next week, which will culminate with NFP on Fri. I think that they will be more important than the debt ceiling. Funny how "it is" all about "the economy, stupid".
And why is the market not going up on better-than-expected Q2 earnings? All good corporate news have been cancelled by debt ceiling drama. So the weight of economic slowdown around the world has tipped the scale. Watch those reports next week for defining moment in the market's next move.
Market Update Stocks Commods Forex
What is usually a calm time of the year, summer has turned out to be absolutely nuts. And we are just getting started I say. SPX index futures are testing 200dsma. There are a lot of players who buy on these tests. Today will be no different. Wait for a meaningful bounce to short. Why short? We just got preliminary Q2 and revised Q1 GDP, which has showed that we are starting to look like Japan of the last 20 years. Care to look at their stock market chart from 1990? Before you throw any stones at me, I am just reporting, do not shoot the messenger. So, many traders will let the SPX bounce into 1295, and will pull the short trigger. Do not short the QQQ, NQ, NDX please. AAPL, GOOG, PCLN, AMZN, and BIDU are going to muddy the waters for shorts there. If you want to do it selectively, short SOX.
Oil is sinking like a rock this morning. Absolutely no surprise. World economy is grinding down to a halt again. Watch 95, has been a support and will be bought temporarily. Should SPX break 200dsma, watch out below all the way to 90.
Gold is now the only sure thing for traders to go to on the upside. This is a raging bull, and my next paragraph is going to show why. 1610 support has held and all-time highs are being poked as I type
Forex is totally screwed up. GDP report put out some mixed signals on where to go from here. CHF and JPY are hiding places and safety. CAD is getting demolished due to 100% correlation to risk, commodities, and US economy. EUR and GBP are all of a sudden up with US ugly spotlight brighter this morning, no deal in Washington, slower GDP - you peak the reason.
This goes on for not too long I say. Watch for Dollar safety to reemerge in 24-48 hours. As risk-off picks up the steam, DXY will turn around and will head MUCH higher. You heard it here first. Yes, gold and DXY up together. Sounds familiar?
Oil is sinking like a rock this morning. Absolutely no surprise. World economy is grinding down to a halt again. Watch 95, has been a support and will be bought temporarily. Should SPX break 200dsma, watch out below all the way to 90.
Gold is now the only sure thing for traders to go to on the upside. This is a raging bull, and my next paragraph is going to show why. 1610 support has held and all-time highs are being poked as I type
Forex is totally screwed up. GDP report put out some mixed signals on where to go from here. CHF and JPY are hiding places and safety. CAD is getting demolished due to 100% correlation to risk, commodities, and US economy. EUR and GBP are all of a sudden up with US ugly spotlight brighter this morning, no deal in Washington, slower GDP - you peak the reason.
This goes on for not too long I say. Watch for Dollar safety to reemerge in 24-48 hours. As risk-off picks up the steam, DXY will turn around and will head MUCH higher. You heard it here first. Yes, gold and DXY up together. Sounds familiar?
Econodata July 29
We do not even need to wait for Chicago PMI @ 9:45. Preliminary GDP stole the day. What an UGLY report. I am stunned by Q1 revisions! Many cheerleaders will try to put a lipstick on this pig, and will say "this is rear view mirror", but I doubt anyone listens to them today. This said, we have a Jackson Hole, WY meeting of masterminds coming up. This was the venue Mr. Bernanke used last year to prop up the risk-on trade, when he unveiled QE2. Do we get a repeat??
I will update after 9:45 am Chicago PMI.
Update
Chicago PMI out - weaker than expected.
I will update after 9:45 am Chicago PMI.
Update
Chicago PMI out - weaker than expected.
Thursday, July 28, 2011
Late Night Thoughts
It is 11:35 pm edt and US stock index futures are cratering due to no vote tonight. There are a few pretty huge implications for tomorrow's session because of this.
1. Major players will be selling early tomorrow. Summer weekend lack of liquidity will worsen the trading conditions later in the day. Big guys will sell in AM and hit the road to vacation homes.
2. To exacerbate the things further, preliminary 2Q GDP will be out @ 8:30 am edt, followed by Chicago PMI @ 9:45 am edt. I think if those two are weaker, we are going to have a climax selling into European close @ 11:30 am. Stabilization at lower levels will be the plan for the rest of the day, especially if politicians throw nasty accusations at each other on national TV about who's fault it is that we are going to default. Will not be pretty at all folks.
3. Dollar index is getting weaker just after "no vote" news. I suspected this would be the outcome if Washington train derailed. Wait for further weakness to get back into buck. If your stops (after scaling out some) are still below here, hoping not to get stopped out is the only thing left to do. I still think DXY gets it going if end of the world is the theme of the next week. Give it 24-48 hours to sink in. Anything below 73 is a screaming buy. Just look at treasuries. They are up as I type! Aren't we about to default??
4. Do not get complacent. It will definitely not be a one way street. SPX 1284 and 1275 are supports. There are a lot of money sitting and waiting to get in on weakness. We are in the middle of the earnings season which produced above expectation results, with respectable guidance as well. So investment public is ready to buy, as they have been taught for decades, on weakness.
Good Luck tomorrow.
1. Major players will be selling early tomorrow. Summer weekend lack of liquidity will worsen the trading conditions later in the day. Big guys will sell in AM and hit the road to vacation homes.
2. To exacerbate the things further, preliminary 2Q GDP will be out @ 8:30 am edt, followed by Chicago PMI @ 9:45 am edt. I think if those two are weaker, we are going to have a climax selling into European close @ 11:30 am. Stabilization at lower levels will be the plan for the rest of the day, especially if politicians throw nasty accusations at each other on national TV about who's fault it is that we are going to default. Will not be pretty at all folks.
3. Dollar index is getting weaker just after "no vote" news. I suspected this would be the outcome if Washington train derailed. Wait for further weakness to get back into buck. If your stops (after scaling out some) are still below here, hoping not to get stopped out is the only thing left to do. I still think DXY gets it going if end of the world is the theme of the next week. Give it 24-48 hours to sink in. Anything below 73 is a screaming buy. Just look at treasuries. They are up as I type! Aren't we about to default??
4. Do not get complacent. It will definitely not be a one way street. SPX 1284 and 1275 are supports. There are a lot of money sitting and waiting to get in on weakness. We are in the middle of the earnings season which produced above expectation results, with respectable guidance as well. So investment public is ready to buy, as they have been taught for decades, on weakness.
Good Luck tomorrow.
U-Turn
Market has ran into suspected resistance @ 15min200 and turned around hard. Our politicians are the best contrarian indicator, spoke just in time to coincide with technicals. Today was one of the purest and easiest tow-way trading days of the year, surprisingly. If you made the money sit out the vote time. Perhaps it will not even matter, as we understand it now, Mr. Reid and Co. will reject it in senate. Uncertainty breeds opportunity. Use it to your advantage.
ES_F SPX futures closed at low of the day. Traders were ready to sell the rally, and used some mildly better economic news to lighten up positions. Risk-off environment continues for a while longer. 50 dsma served as a resistance on cash index. Next support comes in @ 1295. Here are the levels to watch if things really progress towards the worse http://viewonmarkets.blogspot.com/2011/07/spx-new-levels-on-downside.html
ES_F SPX futures closed at low of the day. Traders were ready to sell the rally, and used some mildly better economic news to lighten up positions. Risk-off environment continues for a while longer. 50 dsma served as a resistance on cash index. Next support comes in @ 1295. Here are the levels to watch if things really progress towards the worse http://viewonmarkets.blogspot.com/2011/07/spx-new-levels-on-downside.html