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Retracement or reversal in the S&P ?

29 January 2010

 The Technical Trader's view:

WEEKLY  CHART

The sell-off has been brisk with a sharp increase in volatility. 

But in the context of the bull run from the beginning of 2009 it has yet to be extensive. 

Nor is there any reversal pattern in place. 

In addition, we can see that the minimum move implied by the clear Head and Shoulder Reversal pattern lies far above the market. It is at the top of the band of horizontal resistance from the two prior Lows in 2008. 

Which is a powerful coincidence. 

We remain bulls. 

DAILY CHART  

The technicals did not especially anticipate the sell-off (there was for example no completed Top formation) but they did suggest vulnerability. 

It was apparent from the price action that 1128 was important support. 

First because the market bounced of it successively and second because that level was a major Fibonacci resistance from the whole bear move 2007 - 08. 

The subsequent bear move has broken through a series supports from Prior highs. 

Use the range 1073-1093 as wide support. Note that volumes have been dropping on the sell-off suggesting a diminution of bear energy. Only a break of 1073 might send them higher again. Yet even then, because there is no reversal pattern in place we would remain medium-term bulls.

The Macro Trader’s view:

We are currently in the middle of the US Q4 earnings reporting season, which hasn’t gone too badly, but equities are not moving higher, as would be expected, instead they are suffering a correction lower. Why?

One could argue that data has turned a little mixed, and it has. Recent retail sales reports have disappointed and the housing market correction seems to have stalled, just as the government support program for 1st time buyers has expired.

 

But other data has remained reasonably robust:

 

·  Recent ISM manufacturing and non-manufacturing surveys look strong,

·  Capacity utilization has picked up,

·  Consumer confidence has recently firmed,

·  Non-farm payroll, while still reporting net job losses, reports a much lower rate of job destruction, and

·  Today’s Durable goods report wasn’t as weak as the headline number suggests when you look at the Ex-transport report which came in better than expected.

 

So on balance you could argue there is currently more going right in the US economy than wrong. Add in yesterday’s FOMC policy decision in which policy makers repeated their pledge to keep rates at exceptionally low levels for an extended period and the environment for stocks is quite benign.

 

Or would be, but for political threats to the market.

US President Obama has already surprised the markets, especially equity traders, by announcing a levy on US Banks, as a means of compensating US Tax payers for rescuing them. This was a surprise. When the financial assistance was originally offered to the Banks it was widely understood that the US Government was only looking for eventual repayment. But it seems the banks have recovered sooner than expected and are in the process of repaying the financial assistance.

 

Not only that, but business was good last year and big bonuses are back. This has angered the US public, and a President looking weak in the polls has decided to go for popular measures, rather than economically sound policy. 

So he surprised the markets for a second time last week by announcing plans to introduce legislation echoing the 1930’s Glass-Steagall Act. This split Banks into commercial and investment. Obama wants to stop banks owning or investing in Hedge Funds, Private Equity funds and from operating their own Proprietary trading desks. 

The income Banks receive from Prop trading is typically 5 - 10% of total revenues, but that isn't what has upset equity markets, especially the S&P. The markets have been upset by the air of hostility to Wall Street and they don't know where it will end. Thus the S&P has driven lower over the last several days. 

How much further the move can go is unclear. Last night's FOMC policy statement and State of the Union address may have stopped the rot. News that Ford has made a whole year profit for the 1st time since 2005 also helped. 

But unless and until Obama explains exactly what he intends to do and re-assures markets that he isn't anti business or anti Wall Street, this market could remain fragile. 

Mark Sturdy

John Lewis

Seven Days Ahead

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