It was a somewhat uneventful day as markets ended relatively flat from the S&P to commodities and exchange rates. Is this a sign of a sea change following a week of up days? It just might be. Leaving Europe aside, the start of the earnings season kicked off rather disappointingly, which is likely to be reflected in tomorrow’s trading session. For example, Alcoa fell well below estimates while Goldman Sachs is forecast to have its worst quarter since later 2008.
After several days of subsiding volatility, today remained very stable as the S&P remained within an approximate 10 point range. Investors might be regaining their risk appetite as seen by an infusion of $1.23 billion into SPY yesterday a result of a pullback in the VIX and recently flat performance in bond ETFs. However, I firmly believe that there are too many negative signals warranting justification to get back into equity ETFs. There is simply very little evidence at the moment suggesting a move into bull territory.
In relation to Europe, the overall picture still isn’t looking so good. Greece is set to receive an $11 billion loan next month as part of its $110 billion rescue package which doesn’t bode well for investor confidence in Greece’s ability to escape default.
Adding another twist to the European debt crisis fiasco, just when the situation appeared to be under control after France and Germany’s joint statement to recapitalize banks, political turmoil has surfaced once more.
Putting a thorn in the side of EFSF enlargement plans, seemingly trivial Slovakia rejected an expansion of the facility in round one of the parliamentary vote, the only country not to approve the measure. A failure to ratify the measure could ramp up volatility again and lead to a sharp decline in the market if there is no credible short-term debt aid plan in sight.
In other words, the market may rear its ugly head quite violently tomorrow, unless the second round vote approves the expansion.
Putting everything into proper perspective, there is too much uncertainty in the market that would sway me from my current decision to stick to cash and bond ETFs. Especially with a subpar start to the earnings season and more political tension brewing in Europe, I remain resolute in our investment strategy going forward over the next couple months.
The trading range I have been referring to over the past few weeks is still alive and well as the updated chart, featured by Global Economic Trends, clearly demonstrates:
The recent eye watering rebound has pulled the S&P 500 merely out of the basement (~1,100 level) and towards the upper part the range defined by a high of 1,230. Any clear piercing to the upside could mean a resumption of the major upward trend, which pretty much goes along with my Domestic Trend Tracking Index (TTI), which also has been stuck in a sideways pattern for the past 2 months.
Any poor news earnings wise, or especially a hiccup in Europe’s attempt to solve its debt crisis, will very likely result in an instant short-term trend reversal, which will send us either back to the lower range of the band again, or even past that.
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Comments 4
I agree, Ulli. Slovakia’s “veto” throws yet another “monkey wrench” into the EU’s plan to bail out Greece. I imagine tomorrow, Wednesday, October 12, will be a big pullback. From there, it could be the beginning of a freefall, for the S&P, to as low as even 900. There is too much bad news: The EU problems; the upcoming U.S. government gridlock revisited, again, shortly; and China’s economy not doing as well as it was thought to be doing. While our government said, on September 10, 2010, we were no longer in a recession, I think that’s government propoganda; we’re still in a recession, from everything I see and hear. If the stock market gets in sync, with the U.S. and world economies, (which often it isn’t) we could be in for a big slide down, quite quickly, I think.
JC,
Sometimes markets climb a wall of worry, which is what we’re seeing right now. The futures point to more gains, as some news out of Slovakia is considered encouraging. I am curious to find out if we actually will break out to the upside as per my post from early this morning, which features an update of the sideways pattern of the past 2 months.
Ulli…
Does anyone else feel like it’s the calm before the storm, like we’re watching events leading to a train wreck? We have the possible/probable-default problem of Greece, with lackluster attempts to solve it so far in a European Union requiring awkward areement of 17 countries, along with the looming problems of the other three PIGS countries. And we have the USA coming down the track to a Thanksgiving (11/24) deadline for a bipartisan budget-balancing agreement needed to avoid insane automatic budget cuts, with no indication at all that the two parties can break out of their ideaological strait jackets to reach a workable compromise. These are accompanied by slower growth world-wide, and high unemployment and the continuing dismal housing market here, among other things. All the makings for an economic “perfect storm.” I can easily see the markets going below their recent ranges beginning about 11/21 and then really falling after Thanksgiving, no matter how rosy the markets might look in the meantime.
Virleo,
I see it as perfect storm as well, but if a break out to the upside occurs, you need to follow the market’s trend (with sell stops), which to me overrides all arguments to the contrary.
Ulli…