The market has started the week with a gap lower. The looming debt ceiling remains the headline, and the risk of a U.S. Government shutdown continues to be tabled. To add fuel to that, there is now political turmoil in Italy which adds further fuel to the uncertainty in the two largest economic centers in the world.
If you have been reading our blogs it is hard to misinterpret our bearish inclination. I have never had a problem being bullish or bearish when the market conditions dictate, but we want to clarify our position. The way we view the markets is focused around economic and credit cycles. These cycles drive the markets higher and lower. Throughout history, there has never been a market advance that did not end with a corrective move. Every trough-to-peak market advance is followed by a peak-to-trough correction. This sequence of cycles higher and lower creates a mean price level through the middle of the cycles. The market has never failed to revert back to the mean.
On Monday we specified the key criteria for us to go back on “Crash Alert”. We wanted to focus on the first two criteria (Bonds and Financials) in today’s blog.
The market participants are more confused and unanchored than ever from what to expect from the Fed. To make matters worse, it is clear that Republicans have every intention to use the debt ceiling as pawn to attack government spending on Obamacare. Investors are now looking at a new “Fiscal Cliff” style fear. This remains a vulnerable period in the market.
WOW. It wasn’t that the Fed didn’t taper. The message was that economy is in no state to begin tapering any time soon. The bottom line is that the media pundits and analysts were dead wrong. In our past blogs and presentations we have maintained that the Fed will never be able to exit. We will have further follow up presentations to explain.
It is finally here, the most anticipated FOMC Statement of the year. Will the fed taper and how much? The market is pricing in a tapering of about 10 billion will be watching in anticipation if their forecast comes to fruition. We can do all the forecasting we want, but the fed is completely in control of the next market move. Anticipate considerable knee jerk reactions to the initial release including a number of fake out moves higher and lower.
We were looking for the rally to run out of momentum as we approached overhead resistance, but we find ourselves in a very different situation. Larry Summers pulled his name from consideration for being the next Federal Reserve chairman. This has caused a material rally higher in the market as Summers was viewed as hawkish, which implied higher interest rates and more aggressive Fed action. With the dovish Janet Yellen being the front runner we see an immediate price adjustment to bonds and stocks.
The short term momentum is being driven by a good short squeeze as bulls drive the market higher, but we are already overbought on short term indicators. We will on a short term basis be trading higher, but if we start to see failed rally attempts to the upside, it will be an important clue that big money traders are distributing into the strength.
The next few weeks will be absolutely critical to decide what October holds for investors. Stock market tops are a process and not an event. After key highs are hit, there tends to be a prolonged tug-of-war between bulls and bears that has numerous false starts that tend to look like double tops or key top retests.
We have been suspect of a good short squeeze to the upside, and we got it. The question now is does the S&P500 stop at our targeted retracement levels, or does the S&P go for a full double top retest of its highs, driven by technology leadership. To view our retracement targets we published, click here. We remain suspect of the big picture sustainability, but clearly the short term momentum has some gusto.
The market is in a holding pattern anticipating this morning’s Jobs numbers which many are touting as the most significant jobs number of the year in regards to the Federal Reserve’s decision to begin tapering. At the time of writing, the S&P500 futures are consolidating just above the 1650.00 level. I think the markets will gauge the jobs numbers by the reaction of the bond markets which continue to decline forcing interest rates higher.
The market remains in a muddle. The market is starting to see mild signs of being oversold, but is not at any extremes. The headline news of Syria and the pending Friday Jobs report will keep traders on the edge this week. Yesterday was an important clue as the market popped higher over the long weekend and proceeded to be fully distributed only hours into the trading day. The path of least resistance remains lower.
Holidays are over. The trading desks are going to be fully staffed and will be on high alert for the next market move. The question is- will traders see an oversold market that they trade higher or a weak market that cannot be supported? It is likely that many traders will start the weak off with some range bound chop and that the ECB rate announcement on Thursday and U.S. Jobs numbers on Friday will be the focal point for the next significant move.