- Despite a mixed bag of economic readings, the S&P managed to claw its way above 1100 to close at 1106.
- Unfortunately, it would seem like this "breakout" was doomed to fail - the Fed announced it will be raising its discount rate by 0.25% to 0.75%. This came as somewhat of a surprise and in after hour trading, stocks receded and, as expected, Financials were among the biggest losers.
- In my weekly review I wrote: "Any further comments from the Fed regarding its exit strategy should help maintain dollar strength, especially vs. the Euro and British pound" well - it happened and the dollar made fresh highs against the euro and the British pound (as well as other currencies)
- At this point, we are likely to see further USD gains, especially against the weak euro and British pound.
- It remains to be seen how the market will interpret the Fed's move. There is an unlikely scenario in which the move will be interpreted as a sign of strength - i.e. a Fed's vote of confidence in the recovery. However, at least in the short run, this move is much more likely to drag financials (and the broader market) lower as investors figure out the consequences.
Thursday, February 18, 2010
Daily Recap - 02/18/2009
Mixed Economic Reports Hold S&P at Current Resistance
Thursday, Feb 18th, 11:30
Mixed economic readings -worst than expected unemployment report, better than expected Philly manufacturing index - kept the S&P looking for direction. While the market took the bad unemployment numbers in stride, it could not find the momentum it needed to hop above its 1100 resistance.
-forexRoy
Mixed economic readings -worst than expected unemployment report, better than expected Philly manufacturing index - kept the S&P looking for direction. While the market took the bad unemployment numbers in stride, it could not find the momentum it needed to hop above its 1100 resistance.
-forexRoy
Euro to Test SNB's Resolve
The SNB's message over the past months has been consistent - it will fight a stronger Swiss franc. But the market proved to be a mighty adversary for the SNB. Since the EURCHF broke the 1.5 level on 12/18/2009, the SNB attempts for intervention (see chart) were met with massive opposition.
As the EURCHF once again approaches "intervention territory", it remains to be seen whether the SNB will take another shot at intervention or if it finally decided that fighting a weaker euro is a lost cause.
The Chart below points out recent intervention attempts:
-forexRoy
As the EURCHF once again approaches "intervention territory", it remains to be seen whether the SNB will take another shot at intervention or if it finally decided that fighting a weaker euro is a lost cause.
The Chart below points out recent intervention attempts:
-forexRoy
Wednesday, February 17, 2010
Daily Recap - 02/17/2009
- S&P pushed up against its 1100 resistance but was not able to break it. The broad index did manage almost 5 point gain as good earning reports and positive economic data helped ease fears over Greece and the Euro.
- S&P is about to meet its 50 day MA, this time from below - it should be interesting to see if the moving average, which served as somewhat of a support during the 09 rally, will now serve as resistance.
- The dollar has maintained its recent highs even as equities moved higher. Dollar strength comes largely due to Euro weakness as the single currency fails to shake off investors' concerns.
- Fed minutes released today revealed (no surprise) that the Fed is ready to remove some of the emergency measures put in place. Market's reaction to the report was muted.
- Major economic data released tomorrow: PPI, unemployment claims, and Philly manufacturing index. A better than expected (or even in-line) reading should help the S&P extend beyond its current 1100 level. Such a move should also support a continued move higher for the USDJPY and other yen pairs. A better than expected reading should also facilitate greater USD strength against the Euro.
- Conversely, a surprise on the downside will definitely sent stocks lower. In this scenario, we should expect to see EURJPY trending lower, possibly to test its recent lows.
Tuesday, February 16, 2010
Daily Recap - 02/16/2009
- positive earning reports, Japan's better than expected preliminary GDP, and signs of coordinated EU action with respect to Greece helped traders work up some appetite for risk. The S&P 500 bounced almost 20 points as the US dollar and Japanese yen receded against their major counterparts.
- But caution is still warranted. the S&P is rallying straight into resistance at 1100. Even if it breaks above, it still has to deal with a much stronger resistance at 1150.
- In addition, renewed concerns about Dubai's debt (although small in comparison) have resurfaced.
- As expected, the USD is under consolidation. News that China reduced some of its US treasuries holdings last month certainly did not inspire any dollar strength.
- Note worthy - DXY 50 and 200 MAs cross over in what is known as the "golden cross". Momentum traders will often interpret this event as confirmation of the trend which may suggest further strength for the USD.
- Once again, Loonie and Aussie look strongest against both the dollar and yen.Aussie has regained strength after a recent RBA statement mentioned more interest hikes are in store for this year.
- Note - speculation is growing that China will let its currency appreciate by up to 5% against the dollar.
Dubai Reminds Us What Greece Would Like Us to Forget
Renewed concerns regarding Dubai's debt remind us what we need to remember about Greece and the EU - a quick fix is not going to make the problem go away. On a day we see a 20 point rally on the S&P, and the dollar and yen receding, it is tempting to think that the worst of Greece is behind us. But then Dubai reminds us - not so fast..... First, the S&P is rallying straight into a resistance level at 1100. Even if it manages to break this resistance, it still has to retest a much stronger resistance at 1150, so let's hold the celebrations (See chart below). Second, let's be aware of our human nature - we like to see that glass half full.
As humans we have been blessed with a short, selective memory. This unique feature helps us surmount life's most excruciating . Individuals and societies alike are programmed to leave behind painful memories and march forward toward a better future. This mechanism can help us overcome personal or national tragedies. Unfortunately, this same mechanism can also condemn us to repeat our mistakes, as we conveniently forget the undesirable consequences of our actions. So what can we do? we need to stick to the facts and not trade on "hope". Remember that markets reflect expectations and not necessarily current, underlying conditions. As such, markets can fluctuate wildly as expectations change but fundamentals remain more or less the same.
As humans we have been blessed with a short, selective memory. This unique feature helps us surmount life's most excruciating . Individuals and societies alike are programmed to leave behind painful memories and march forward toward a better future. This mechanism can help us overcome personal or national tragedies. Unfortunately, this same mechanism can also condemn us to repeat our mistakes, as we conveniently forget the undesirable consequences of our actions. So what can we do? we need to stick to the facts and not trade on "hope". Remember that markets reflect expectations and not necessarily current, underlying conditions. As such, markets can fluctuate wildly as expectations change but fundamentals remain more or less the same.
Saturday, February 13, 2010
Filling In the Gap
No, not the price gap - the blog gap!
It's been a while since my last post so it's time to fill in the gap. Luckily the themes we've touched upon in the last several posts have played out nicely over the last couple of weeks. They are: (1) Dollar strength, (2) Euro weakness, (3) Equities weakness. So let's examine each theme in light of recent events. Since so much of the market's action has been determined by the Greek crisis, let's begin with taking a look at Greece and the Euro.
EU - On the Horns of a Dilemma
We've already discussed the issues in Greece so a detailed intro is not needed - but here's a brief recap anyway. Grave concerns over Greece's sovereign debt have been at the center of an unfolding drama as of late 2009. The Greek story has dominated headlines and opened the floodgates of fear that came gushing into the markets. Not long after Greece hit the spotlights, concerns over sovereign debt spread like wildfire to Spain, Portugal, Italy (and let's not forget Ireland), wrecking havoc in the "Club-Med" nations' bond and equities markets.
When Greece first made the headlines in November '09, EU leaders and the ECB chose to distance themselves from the center of attention, as Greek officials struggled to reassure nervous markets that everything was under control and that swift austerity measures could rein in a runaway deficit. However, as hopes for quick fix vanished and fears of contagion arose, it became obvious that EU leaders had to step in. But what to do? Each options seemed worse than the next. Letting the IMF step in was just too humiliating. Not doing anything was just too dangerous. Outright bailout posed a moral hazard and opened the door for more bailouts (Portugal, Spain, Italy). The unique structure of the EU, a monetary union with no fiscal or political unity, made the uncertainty even worse. For the first time, the EU was being put to a test for which the Euro was punished severely as traders piled in record numbers to short the single currency.
OK - so much for the "brief" recap. Fast forward to Thursday, Feb 11. European leaders at an EU summit meeting finally spoke up. During a much awaited press conference EU leaders served the markets a big dose of disappointment saying they stand ready to take coordinated action to protect the stability of the EU if such action was needed. At the same time, they insisted Greece did not need external help at this point.
The lack of clarity and conviction projected by EU leaders weighed heavily on the Euro as it plunged to test its recent lows against the dollar and the yen and made fresh, multi-year, lows against the aussie. After its massive slide following the press conference, the Euro managed a small bounce against the dollar and the yen but remained largely in the bears' hands. And in overnight trading, the Euro slid further against the dollar to break yet another level, this time stopping just shy of 1.3500.
Euro sentiment remains largely bearish. So long as uncertainty concerning the Club-Med nations lingers, the Euro will remain under pressure. With so many piled on the short side, it is likely we see some contrarian move to the upside, a move which may provide a profitable opportunity to re-short the Euro.
USD - Raging Bull
US dollar reversed its multi-week slide late last year and has been on tear since then. The initial strength in the dollar was due to signs of a recovering US economy. Since then, however, the rise in the dollar was strongly associated with flight to safety as fears over Greek debt, China's monetary tightening, and pending US banking regulations contributed to risk aversion among traders and investors. In the land of the blind, the one-eyed man is king. And so it is in the forex markets where the USD was the least worse of a pretty bad bunch.
The USD is approaching another congestion area which may act as a temporary roadblock. In the chart below, you can see the DXY reaching a resistance zone between the blue and red lines:
A major milestone for the US economy and the US dollar went almost unnoticed this week as Chairman Bernanke's testimony got canceled due to a heavy snow storm in the DC area. Bernanke's prepared testimony was released to the media. It outlined the Fed's exit plan for withdrawing the emergency measures it had put in place in the early days of the financial crisis. While repeating the Fed's mantra of "exceptionally low for an extended period" referring to the near zero interest policy, Bernanke's testimony definitely sets the stage for tightening. The question is, how will the market interpret tightening moves when they are finally announced? Depending on many factors, markets are likely to have one of two reactions: 1. interpret tightening as a sign of strength (risk back on) or 2. devastating blow to a fragile economy (risk off). A third and least likely scenario is a mixed reaction somewhere in between. Given a mildly positive parade of economic data and earning reports, option one (interpretation of strength) seems the most likely - but not by much.
S&P - a Long Awaited Correction
Most market participants were caught off guard in March of 09 as a massive rally in equities emerged from the rubble of the financial disaster. By the time it became evident that the rally was real, traders were faced with two options - chase the market or wait for a pullback. Well, for those who opted for the latter, a generous amount of patience was needed. The much anticipated pullback stubbornly refused to arrive - that is, until January 2010, when The S&P 500 climbed back to 1150 and finally met a resistance strong enough to send stocks lower.
Concerns over sovereign debt provided a perfect backdrop the S&P's decline. However, it would seem that other forces were in play, specifically, large market participants booking profits for 2009. A quick look at the charts reveals that 09 market leaders such as financials and materials, actually turned lower before the broad market sell off, suggesting profit taking and sector rotation.
Keeping Things in Perspective
With all the gloom out there, one must keep things in perspective. For example, fourth quarter earning season has been, thus far, quite positive with most companies meeting or beating expectations. Jobs, unemployment, and inventory numbers also continue to show signs of improvement. Greece is unlikely to default on its debt. And China's monetary tightening is a response to a booming economy - not exactly a bad thing! Moreover, companies have reduced bottom line costs and are well positioned to show bigger net income gains as top line revenue streams return to normal levels. That is not to say everything is rosy. Of course there are lingering concerns (record foreclosures, commercial RE, weaker consumer demand, to name a few) but on the whole, a double-dip recession seems a less likely scenario than a moderate recovery and a range bound equity market.
A quick look at a weekly chart of the S&P 500, shows that the weekly uptrend, while losing momentum, is still intact and that the 1250 (generally accepted) target is still in sight.
Thoughts for the Week Ahead
Subtle disparities in market action on Thursday and Friday, may hold some clues for the week ahead:
It's been a while since my last post so it's time to fill in the gap. Luckily the themes we've touched upon in the last several posts have played out nicely over the last couple of weeks. They are: (1) Dollar strength, (2) Euro weakness, (3) Equities weakness. So let's examine each theme in light of recent events. Since so much of the market's action has been determined by the Greek crisis, let's begin with taking a look at Greece and the Euro.
EU - On the Horns of a Dilemma
We've already discussed the issues in Greece so a detailed intro is not needed - but here's a brief recap anyway. Grave concerns over Greece's sovereign debt have been at the center of an unfolding drama as of late 2009. The Greek story has dominated headlines and opened the floodgates of fear that came gushing into the markets. Not long after Greece hit the spotlights, concerns over sovereign debt spread like wildfire to Spain, Portugal, Italy (and let's not forget Ireland), wrecking havoc in the "Club-Med" nations' bond and equities markets.
When Greece first made the headlines in November '09, EU leaders and the ECB chose to distance themselves from the center of attention, as Greek officials struggled to reassure nervous markets that everything was under control and that swift austerity measures could rein in a runaway deficit. However, as hopes for quick fix vanished and fears of contagion arose, it became obvious that EU leaders had to step in. But what to do? Each options seemed worse than the next. Letting the IMF step in was just too humiliating. Not doing anything was just too dangerous. Outright bailout posed a moral hazard and opened the door for more bailouts (Portugal, Spain, Italy). The unique structure of the EU, a monetary union with no fiscal or political unity, made the uncertainty even worse. For the first time, the EU was being put to a test for which the Euro was punished severely as traders piled in record numbers to short the single currency.
OK - so much for the "brief" recap. Fast forward to Thursday, Feb 11. European leaders at an EU summit meeting finally spoke up. During a much awaited press conference EU leaders served the markets a big dose of disappointment saying they stand ready to take coordinated action to protect the stability of the EU if such action was needed. At the same time, they insisted Greece did not need external help at this point.
The lack of clarity and conviction projected by EU leaders weighed heavily on the Euro as it plunged to test its recent lows against the dollar and the yen and made fresh, multi-year, lows against the aussie. After its massive slide following the press conference, the Euro managed a small bounce against the dollar and the yen but remained largely in the bears' hands. And in overnight trading, the Euro slid further against the dollar to break yet another level, this time stopping just shy of 1.3500.
Euro sentiment remains largely bearish. So long as uncertainty concerning the Club-Med nations lingers, the Euro will remain under pressure. With so many piled on the short side, it is likely we see some contrarian move to the upside, a move which may provide a profitable opportunity to re-short the Euro.
USD - Raging Bull
US dollar reversed its multi-week slide late last year and has been on tear since then. The initial strength in the dollar was due to signs of a recovering US economy. Since then, however, the rise in the dollar was strongly associated with flight to safety as fears over Greek debt, China's monetary tightening, and pending US banking regulations contributed to risk aversion among traders and investors. In the land of the blind, the one-eyed man is king. And so it is in the forex markets where the USD was the least worse of a pretty bad bunch.
The USD is approaching another congestion area which may act as a temporary roadblock. In the chart below, you can see the DXY reaching a resistance zone between the blue and red lines:
A major milestone for the US economy and the US dollar went almost unnoticed this week as Chairman Bernanke's testimony got canceled due to a heavy snow storm in the DC area. Bernanke's prepared testimony was released to the media. It outlined the Fed's exit plan for withdrawing the emergency measures it had put in place in the early days of the financial crisis. While repeating the Fed's mantra of "exceptionally low for an extended period" referring to the near zero interest policy, Bernanke's testimony definitely sets the stage for tightening. The question is, how will the market interpret tightening moves when they are finally announced? Depending on many factors, markets are likely to have one of two reactions: 1. interpret tightening as a sign of strength (risk back on) or 2. devastating blow to a fragile economy (risk off). A third and least likely scenario is a mixed reaction somewhere in between. Given a mildly positive parade of economic data and earning reports, option one (interpretation of strength) seems the most likely - but not by much.
S&P - a Long Awaited Correction
Most market participants were caught off guard in March of 09 as a massive rally in equities emerged from the rubble of the financial disaster. By the time it became evident that the rally was real, traders were faced with two options - chase the market or wait for a pullback. Well, for those who opted for the latter, a generous amount of patience was needed. The much anticipated pullback stubbornly refused to arrive - that is, until January 2010, when The S&P 500 climbed back to 1150 and finally met a resistance strong enough to send stocks lower.
Concerns over sovereign debt provided a perfect backdrop the S&P's decline. However, it would seem that other forces were in play, specifically, large market participants booking profits for 2009. A quick look at the charts reveals that 09 market leaders such as financials and materials, actually turned lower before the broad market sell off, suggesting profit taking and sector rotation.
Keeping Things in Perspective
With all the gloom out there, one must keep things in perspective. For example, fourth quarter earning season has been, thus far, quite positive with most companies meeting or beating expectations. Jobs, unemployment, and inventory numbers also continue to show signs of improvement. Greece is unlikely to default on its debt. And China's monetary tightening is a response to a booming economy - not exactly a bad thing! Moreover, companies have reduced bottom line costs and are well positioned to show bigger net income gains as top line revenue streams return to normal levels. That is not to say everything is rosy. Of course there are lingering concerns (record foreclosures, commercial RE, weaker consumer demand, to name a few) but on the whole, a double-dip recession seems a less likely scenario than a moderate recovery and a range bound equity market.
A quick look at a weekly chart of the S&P 500, shows that the weekly uptrend, while losing momentum, is still intact and that the 1250 (generally accepted) target is still in sight.
Thoughts for the Week Ahead
Subtle disparities in market action on Thursday and Friday, may hold some clues for the week ahead:
- Euro pummeled as US equities rise - we are used to seeing US equities and the Euro trade in tandem. However, last week saw a rise in US equities and a slumping Euro.
- Yen easing against the Canadian and Aussie dollars and, to a lesser extent, against the USD- this is another sign of risk abating to some degree.
Given last week's market action and news coming out Europe, we may begin to see Greece's problems contained within the EU, keeping the Euro depressed. In this scenario, we should continue to see the S&P basing around its recent levels and the yen easing further against the Aussie and Loonie. The US dollar is likely to see some consolidation this week as it hits a new level of resistance. Any further comments from the Fed regarding its exit strategy should help maintain dollar strength, especially vs. the Euro and British pound.
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