Next week there will be absolutely no doubt about where this market is headed. Three huge separate events on deck and it starts off Tuesday, when we get the election results the market has been waiting for. It wants to see more of a log jam with more republicans gaining seats. If that takes place, and appears that it will, the market, you would think, will like it. I’ll get in to it’s built in stuff later on.
We then turn to Wednesday. This is far more important than Tuesday’s elections. This is about the fed talking about QE2. Will he allow it? Will he cut it off? Will he cut it back? The market wants to know where Mr. Bernanke stands on this critical issue of flooding liquidity. Again, if the market gets what it wants, will it even matter is what we all want to know. Again, more on that later on in this newsletter.
Finally, we hit Friday where we see what’s going on in the world of job creation or lack thereof. This report is even more important than the first two.
Each of the big three working its way up the ladder of importance. What a week. It will be and a very long time since we saw a week this important to the world of the stock market. By the time we see those futures Friday morning after the jobs report, the market should be looking very different than it does today. Wild times are dead ahead. Buckle up. You all individually have huge decisions to make on how you want to position yourselves in front of this interesting week. The fireworks are here. Enjoy the ride!
Now the question becomes one of what will the market do with all of this? Everyone has an opinion. I do as well. It’s just one man’s opinion, and by no means do I pretend to think I’ll get this one right as no one truly knows the answer. We let our heads formulate a decision, which is based mostly on where we stand in the market as either being bullish or bearish. I will not be heavily positioned, although, I can tell you I will come from a place of truthful thought and belief.
I think it’s a big mistake to say it’s all built in. You can have a quick reflexive move on the news, but that doesn’t mean that’s what we’ll see shortly after the initial knee jerk response. My thinking is that if it was built in, this market would have sold off very hard just in front of these news events. It has not. Not at all. It has held up well in to overbought oscillators. I think the market will react to the news given and not to the belief that it’s all in already. Again, outside of an initial knee jerk response, I think this market has the opportunity to move appreciably higher if the news is exactly as the market wants it.
If it doesn’t get what it wants it’ll start that correction it’s looking for as it seizes on bad news to get those oscillators unwound. Folks will then incorrectly say it was built in ahead of time. It will be about the truth. If the market gets what it wants I do not think it’ll sell off hard and stay that way. I think any early selling will be bought back quickly, if we indeed sell at all. It’s very dangerous to formulate an opinion based on the “it’s already built in” thinking.
The S&P 500 has yet to make its full measurement, which would be 1220. Left- and-right neckline at 1130 with the head at 1040. This ninety-point measurement over 1130 equals 1220. If the news is really bad this week from a Wall Street perspective, it will not be reached and the pattern will have completed itself roughly 2% shy, which isn’t bad. The Nasdaq has made its full measurement. If the news is more favorable, I think it wouldn’t take too long to get at least close to 1220 on the S&P 500, even if we sell some first.
The market has been grinding lately due to overbought oscillators, but some lateral overall action the past many days has helped on that front somewhat. Not to what I’d like personally, but keeping in mind that markets stay overbought more than they do oversold, has helped some and if the market gets just the right news, it can go higher and complete the pattern measurement. If the news is bad it can make a dash lower as far as the 50-day exponential moving average currently at 1146. As long as that holds it keeps the up trend in place. But a move forcefully below 1146 S&P 500 would be more bearish and a change of the trend in place.
It’s no secret that the financials stink for lack of a better word. However, they are not dead with many of the critical issues still holding above their prior lows and with their oscillators not in terrible shape. They need to get going, but that’s an old story. A boring one really. They haven’t, but have yet to break down totally. Watch 45.00 on the KBW Bank Index (BKX).
If the market does not like the news next week, I would expect this sector to lead the market lower. It could also just as easily surprise to the up side if we get the perfect mix of news. Only Bank of America Corporation (BAC) has really broken down, and if you look outside of the United States you can see stocks such as The Toronto-Dominion Bank (TD) and Bank of Montreal (BMO) doing quite well. There is hope, but the moment of truth is close at hand, and thankfully so. It’s boring watching them do nothing day after day. Even if the news is bad, at least we’ll have some true clarity.
So how do we position? You have some exposure but not too much. You might say I wish we had more, or you’ll be saying, thankfully we’re not loaded up. It’s impossible to know folks. I can’t foresee the future although I’m working on it (smile). The trend is unquestionably up, and thus, you have to come from that perspective until it’s broken. Simple as that, really. So yes, we’ll have some exposure, and it’s possible, I’ll add a drop more, but not too much. Be prepared for a very interesting and wild week ahead.
Peace,
Jack
