The last time the S&P 500 cash index (SPX) closed this low ($1099), was just after QE2 was announced last year. It has been argued that Quantitative Easing has only benefited the big banks and inflated stock prices, while paving the way for inflation. Scratch off inflated stock prices, they are now back to the level just after QE2 was announced.
In terms of trading, today's lower close is very negative. I had anticipated a potential bear trap was likely and that the markets may rebound after a fake-out to the downside. Today's price action is not reminiscent of a fake-out however and suggests lower prices are in the cards. Too early to confirm anything, so we'll see...
Monday, October 3, 2011
Where Will The Market Head Next?
The bottom of the trading range on the S&P 500 looks like it will be tested this week as the ES closed with weakness on Friday. I expect the 1104-1106 (ES) support to be tested. I like longs here, though I won't defend entries. If 1097 is breached it will setup the potential for new lows to be made. I don't expect that we see lower lows this week. A move below 1100 ES will setup a nice bear trap in my opinion, I believe market sentiment is overly bearish and usually when everybody is predicting lower lows, the reverse happens.
Regardless of technicals and sentiment though, all it takes is for one significant European bank to fail for chaos to ensue and for global markets to continue their sell-off.
The Franco-Belgian bank Dexia was put on a negative downgrade watch today by Moody’s. Liquidity problems in banks will have a detrimental effect on the markets, so it is important to be aware of the potential for this. Remember 2008? Remember Bear Sterns? Remember Lehman's? Remember that the crash of 2008 followed the failings of these banks? Remember AIG? AIG got bailed out. If liquidity issues become a problem again, expect more bail-outs.
U.S. Treasury Secretary Timothy F. Geithner has warned that failure to bolster European backstops would threaten “cascading default, bank runs and catastrophic risk” for the global economy. James Bullard, St. Louis Federal Reserve President said that “the Fed has potent tools at its disposal and is not now, or ever, out of ammunition. Should further weakness develop, monetary policy will need to respond appropriately.”
Bernanke already pledged to fund as much money as is needed to prevent bank defaults around the world. If more money is printed, what happens to Gold and Silver? They go up. Gold and Silver have already been beaten down. What is the significance? The precious metals present potentially great buying opportunities at their current corrected prices (keep in mind though, I'm not saying the precious metals can't go down further from their current prices, I'm just saying they are setting up to be good buying opportunities). I am currently long Silver and you can read my comments about that trade here.
Overall in regard to the market indexes, I am not going to try and guess the next direction. We are currently trading in a range (roughly 1100-1200 ES) and until the markets confirm something different, that's how I will continue to play it.
Regardless of technicals and sentiment though, all it takes is for one significant European bank to fail for chaos to ensue and for global markets to continue their sell-off.
The Franco-Belgian bank Dexia was put on a negative downgrade watch today by Moody’s. Liquidity problems in banks will have a detrimental effect on the markets, so it is important to be aware of the potential for this. Remember 2008? Remember Bear Sterns? Remember Lehman's? Remember that the crash of 2008 followed the failings of these banks? Remember AIG? AIG got bailed out. If liquidity issues become a problem again, expect more bail-outs.
U.S. Treasury Secretary Timothy F. Geithner has warned that failure to bolster European backstops would threaten “cascading default, bank runs and catastrophic risk” for the global economy. James Bullard, St. Louis Federal Reserve President said that “the Fed has potent tools at its disposal and is not now, or ever, out of ammunition. Should further weakness develop, monetary policy will need to respond appropriately.”
Bernanke already pledged to fund as much money as is needed to prevent bank defaults around the world. If more money is printed, what happens to Gold and Silver? They go up. Gold and Silver have already been beaten down. What is the significance? The precious metals present potentially great buying opportunities at their current corrected prices (keep in mind though, I'm not saying the precious metals can't go down further from their current prices, I'm just saying they are setting up to be good buying opportunities). I am currently long Silver and you can read my comments about that trade here.
Overall in regard to the market indexes, I am not going to try and guess the next direction. We are currently trading in a range (roughly 1100-1200 ES) and until the markets confirm something different, that's how I will continue to play it.
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