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Where Is The Market Headed?

Posted by Larry Doyle on August 2, 2010 9:59 AM |

In commentary written specifically for Sense on Cents, our friends from Forextraders.com share some fabulous insights and perspectives on the ups and downs of the equity markets.

The Stock Market Is In Limbo—Which Way Will It Go?

An incredibly positive corporate earnings season in July has helped the market to discount immediate fears of a possible double dip recession. The strong corporate earnings reports, however, had to battle Ben Bernanke’s very dovish remarks, as he emphasized the slowing recovery in the U.S. and raised the possibility of Federal Reserve instituting further quantitative easing measures. Those bearish remarks by the Fed President regarding the possible future direction of the U.S. economy did cause equity markets to stall in the 3rd week of July, but now in the final week of the month, equity markets are again taking a shot at the HI’s from the month of June.

As the Dow Jones creeps higher it is going to face a tough test at the 10,600 level. This is the area where price reacted with a violent failure in June. Currently on the Daily Chart in the Dow Jones, we are looking rather bullish. Price moved from the lows of 9,600 in early July to a HI at 10,400 before it began a corrective move down to 10,000. Since hitting 10,000 last week, the Dow has been moving higher and we appear to now have a higher HI in place on the Daily Chart, which generally is a sign of continued bullish movement.

Where Is the Market Headed?
In Chairman Bernanke’s testimony before Congress, he made it clear that the economic recovery in the U.S. was slowing. Now, the market’s attention is going to be on U.S. economic data in order to help discern how bad the slowdown will be. First of all, investors must understand that a slowdown is okay. In fact, after the rapid rebound from the lows of March 2009, the global economy is due for a small slowdown. What we don’t want to see, however, is a contraction in growth. Slow growth is okay, while contraction is very dangerous. If economic data begins to show economic contraction, then the threat of a double-dip recession could become very realistic, and the market would have a very difficult time moving higher.

However, if economic data coming out during the next few weeks shows that the U.S. economic recovery is still moving forward, then we should see further gains in the equity markets. All attention is currently set on the Advanced GDP figure that will be released on Friday July 30th. The figure is expected to come out at 2.5%, which is slightly lower than the previous quarter. The lower projection is in line with Bernanke’s remarks concerning a slowdown in the economic recovery. If this number comes out lower than 2.5%, it could mean very big trouble for the U.S. equity markets. If the number comes out 2.25% or less, expect a large sell-off in the U.S. equity markets. If could get very ugly.

Currently, Mervyn King in England and Ben Bernanke are both warning of very difficult times in the near future for the global recovery. Jean-Claude Trichet at the European Central Bank, however, is not as dovish as these other two. The fact that we have two of the three most powerful economic and financial leaders in the developed world very bearish on the global economic recovery is not a very good sign for the U.S. equity markets. Although the markets are fighting to move higher at the moment, it could all change very quickly if U.S. economic data begins to surprise to the downside. Market participants are fully aware that the recovery is slowing, and as we stated earlier, that is okay. The problem is going to be when the data begins showing greater downside risk than is currently being projected. If that happens, brace for a strong equity market sell-off and volatility to increase in the currency trading market.

With the initial 2nd quarter GDP release coming in at 2.4%, will the markets tread water waiting for more defined clues as to where our economy is truly headed? Will the markets rally further in anticipation of another wave of quantitative easing? Although summer trading volumes are not deep, the cross-currents at work in our markets and economy remain challenging. Navigate accordingly.

Thank you to Forextraders.com for this custom commentary.

LD

  • fred

    Today’s market action is indicative of the bullish case/trend. Weak $US overnight leads to higher oil and commodities premarket, stocks gap open on higher oil and materials squeezing the shorts, bonds sell off a bit, gold rallies on inflation implications of weaker $US.

    Prior month revisions lower to economic data allow current month’s data to mildly beat expectations building the case for an improving economy, shorts are still scrambling from the gap open and economic data gives them no headline leverage. Presto, resistance becomes support, repeat as/when necessary, thankyou prop desk gods, Wall Street is alive and well.

    If short rates begin to spike, no worries, the Fed will talk up deflation and images of the Great Depression forcing rates right back down. Long live Ben bernanke, the talking Feds, and an upward sloping yield curve.

    • LD

      Rule # 1

      Don’t fight the Fed.

      When other rules do not seem to work or apply, always come back to this.

      • fred

        LD,

        Sometimes I wonder if don’t fight the fed may be all anyone really needs to know, all the rest (economy, earnings, etc.) may be just noise.

        • LD

          Fred,

          All the other discussions make for good banter but there is a reason why the above rule is in fact Rule #1.

          Is the market rallying currently in anticipation of another round of QE? It does seem that the messages coming from the Fed are trying to prep the market for exactly that.

          • fred

            LD,

            The most interesting aspect of this whole discussion is whether the Fed acts on it’s own or if their is a collusive effort involving banks and/or other sovereign entities. Have you done any blogs on the existence of a “plunge protection team”? The ends justify the means.

  • Mike

    Well once we see actual volume again, we should start seeing a drop in the DJ and S&P. The charts on WSJ show that there really hasn’t been much volume this past July while the market moved upwards, or any other upward moves for that matter.

    Today as the bulls fire the guns of August, I’d like to believe this is a head fake to get the dumb money on the bid side. AUD/JPY failed to make new highs today, and EUR/USD may find a ceiling at 132.00. If these two pairs end up proving me wrong, I might just have a more positive outlook.

    If the market is rallying for any reason, it’s due to lack of volume, making the bears sweat, and making the sideliners filled with regret that they aren’t in. QE 2 or not, I just really don’t believe anything fundamental. It’s all about head faking, stop-loss hunting, shorter term technicals, front running, and reverse (reverse) reverse psychology.

  • LD

    Fred,

    Oh, boy have we got stuff to talk about. This topic goes back to “are the markets being manipulated?”

    I did a three or four part series on this topic a year ago as it revolved around the whole topic of high frequency trading.

    Is Uncle Sam Manipulating the Markets?

    Is Uncle Sam Manipulating the Markets Part II

    Is Uncle Sam Manipulating the Markets Part III

    • fred

      LD,

      You have alot of material on the how but not the who and when. As I understand it, high frequency program trading can be “manipulated” to produce trend (liquidity) rather than noise (volume). Aleynikov was an expert in routing strategy utilizing the specialist bid ask book. Translation: unexecuted orders to buy or sell can be entered and removed with lightening quick speed in such a way as to “manipulate” actual price direction without the necessity of an order even being executed. The only thing left to do to bank a profit is enter and exit a position.

      I’m more interested in the potential collusion that might occur to manipulate trend (higher) upon the release of gov’t reports, etc.

      When the Fed is pursuing an “easy money policy”, it is trying to stimulate growth despite potential inflationary implications. Does the Fed view higher stock prices as a necessary precursor to a growing economy? On balance, do high frequency traders manipulate prices higher rather than lower, as repayment to the Fed for increasing profits due to lower borrowing costs or is there even something more sinister affoot? It seems most strong trend moves start in overseas markets in afterhours trading in an obvious attempt to generate short covering activity when US markets open?

      I do know the President has a semi-secretive “plunge protection advisory committee” that advises him in times of “crisis”. Bernanke has been questioned about this “advisory committee” in Congressional testimony. As you would expect, his response was evasive, but he did openly acknowlede the existence of this group. Do you think this group led by the President understands the difference between crisis and micro management?

      • LD

        Fred,

        What was the movie in which somebody said, “I can tell you but I’d have to kill you.”?

        Well, I think the question you ask is clearly the one many, including me, wish they had clear info to answer. You certainly have a fabulous feel for the markets. I definitely believe the powers that be in Washington believe that equity valuations impact consumer appetites. In that vein, are they actively manipulating markets to influence consumer spending? My best guess, is that there is some degree of government intervention in the equity markets. How, who, when are all great questions but the best guess is that the banks own portfolios are utilizing their HFT platforms and their own capital to make this happen. I know that is not new information or enlightenment but I do not think anybody in the market has the smoking gun.

        Does the end justify the means? In government operations, it often does, no?

  • fred

    The Fed is “Top Gun”, Ben is piloting a helicopter gunships. Repeat after me…don’t fight the Fed.

    Speaking of movies, I’m reminded of a line from Alice in Wonderland, “Begin at the beginning, go to the end, then stop”.

  • divvytrader

    lemme see ….. almost every economic datapoint in last 6 weeks been horrible . Home sales and consumer sentiment a joke . Look at today …. Personal Income and Spening all misses . factory Orders a big miss . Pending Home sales a huge miss . Now we see Ford and GM missing on car sales . 2yr UST at 0.52% !!! 3yr at 0.76% !!! alltime record lows . Way below where they were when LEH/BSC were blwoing up . Stock bulls ? GET IN THERE AND BUY !!!!! ICI has reported net outflows out of US equity mutual funds the last 12 weeks in a row but markets have rallied despite this . How is this possible we see retail leaving stock funds , economic data horrible , and markets soar ?

    • LD

      Divvy…another round of quantitative easing, perhaps??

  • Sean

    Deflation!






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