The S&P is looking vulnerable to further downside price action. Early last week, the market looked set to snap out of what then looked like a correctionm but a run of weak data, that began with the ISM Manufacturing survey sent the market lower…
TECHNICALS:
WEEKLY CHART
The bull progress of the market is clear. Successive H&S patterns have spring-boarded the market better…until the prevarication at the 1342.30 level.
There is a lack of structural clarity, but the inability of the market to ratchet better on the back of Prior Highs is clear – the failure of the small rally to get back through 1332-1329 was revealing.
And the bears have gained some momentum there is no doubt.
The Prior Lows at 1311.70 and 1305.20 are now good resistance above the market.
The question of when a multiple Top is in place arises: the break of 1285 is not conclusive, and the 1240 looks more compelling for the bears…
FUNDAMENTALS:
The S&P is looking vulnerable to further downside price action.
Early last week, the market looked set to snap out of what then looked like a correction, but a run of weak data, that began with the ISM Manufacturing survey sent the market lower.
The move extended on the back of a disappointing ISM non-manufacturing survey and weak non-farm payroll. Traders began to speculate the Fed might respond to what is clearly a weakening economy with a rethink on their QE policy which expires at the end of this month.
Indeed, there were two opportunities for the Fed to communicate a willingness to offer fresh support this week:
- The Beige book released on Wednesday, and
- A speech from Bernanke on Tuesday.
The Beige book acknowledged the economy has slowed but attributed the weakness to a break down in the supply chain caused by events in Japan, which should ease when the crisis in Japan eventually eases.
Bernanke also acknowledged the weaker economic performance, but omitted any new commitment to a “QE3”.
Faced with an indeterminate period of economic weakness both in the US and abroad, traders retreated further from equities and the S&P looks set to sell off further.The pull-back already exceeds the sell-off that occurred in March, caused by the earthquake/Tsunami/nuclear crisis, in both duration and points and traders are now worrying if it will revisit the March lows.
We judge the market’s performance from here will be dictated by both US and Global economic performance. The US economy has been showing weakness for several weeks. The housing market is experiencing a double-dip and the labour market is again weak. Jobless claims have re-established firmly above the important 400k mark, the unemployment rate is back above 9.0% with the non-farm payroll report showing the economy simply isn’t creating enough new jobs to absorb new labour force entrants, let alone re-employ the unemployed.
The other negative weighing on the market is the still small but growing threat of a US debt default. The administration and Congress are locked in a battle over how and by how much to reduce the US budget deficit. The Federal government keeps bumping up against its debt limit requiring congress to raise the ceiling on how much the government can borrow.
The House Republicans see refusing to automatically raise the ceiling as a means of forcing Obama to negotiate about a broader debt reduction, but if they fail to authorise a bigger spending limit, there is a real risk the US will perhaps miss interest payments that fall due on its bonds or be unable to repay maturing debt. Either scenario is a default and the impact that would have is serious, not just for the US but globally.
So until that threat is removed this market has several reasons to attract the bears.
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