The moves forecasted by the COT signals make them very adaptable to commodity based ETFs, writes And...
A Ghoulish Week Ahead for the Markets
11/01/2010 12:23 pm EST
As everyone knows, yesterday evening was Halloween, and your neighborhood, like mine, was likely filled with ghosts, goblins, and ghouls as we celebrate this timeless holiday. Halloween is thought to have originated from the ancient Celtic festival of Samhain, or summer’s end, and marks the end of the lighter half of the year and entry into the darker half. It’s a holiday to honor family ancestors and put on costumes and masks to fight off evil spirits and sidestep harm and danger.
But beyond Halloween, All Saints Day is Monday, November 1, a largely Catholic holiday celebrating those who have been beatified, and Tuesday, November 2 is the Day of the Dead, a Latin American holiday celebrating the departed. Tuesday is also All Souls Day, a Western Christian celebration of the departed.
There is some delicious irony in the timing of these holidays celebrating the dead and the warding off of evil spirits with this week’s upcoming action on the economic and political fronts.
For Tuesday, the Day of the Dead, is the day of the midterm elections when the Democrats try to resurrect themselves from the dead and the Republicans attempt to permanently stick a political stake in the hearts of the President and his allies.
Also on the Day of the Dead, Ben Bernanke and his colleagues begin their two-day meeting, which is a desperate attempt to save an economy that’s clearly near death and to ward off the evil spirits of recession and deflation that stubbornly refuse to stop haunting Wall Street, the American economy, and the Federal Reserve.
This week is clearly the most important week of the year on the economic and political fronts with a blizzard of important reports, the election, and the Federal Reserve’s widely watched announcement regarding QE2.Very likely by Friday we will be living in a vastly altered political and economic landscape shaped by the outcome of this potentially ghoulish week.
Looking at My Screens
On a technical basis, the equity markets are set for a serious decline.
Looking at the chart of the Wilshire total market index above, it’s easy to see why this market is set up for a significant decline from a technical standpoint. The red boxes outline the three previous significant tops this year and their subsequent declines. In each case you can see high, overbought RSI readings in the top panel, and Stochastic readings that were overbought and then on “sell signals.
The last box on the right is today’s situation, where again we see high, overbought readings on both RSI and Stochastic and a “sell” signal in the bottom panel.
Furthermore, bullish sentiment is at extreme levels of optimism, insider selling remains high, and volume, breadth, and momentum are all in declines and generating bearish indications.
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The View from 35,000 Feet
It was a sideways week as people repositioned themselves for the week’s high-flying action. On the “smart money” front, more money went into “long” dollar positions and it seems that big players are expecting at least a temporary resurgence in the dollar going forward.
Economic reports this week were largely positive with existing home sales, home prices, consumer confidence, durable goods, new home sales, employment, and GDP all coming better than expected or showing improvements.
On the negative side of the ledger, the Michigan Consumer Confidence index fell to its lowest level since November and a new low for the year as people see less hope and optimism in both current conditions and in the six months ahead. Also, while GDP came in at 2% versus an expected 1.7%, it is nowhere near high enough to trim unemployment and represents sluggish growth at best with many analysts saying that the risk of a double dip remains high.
Estimates of the size and effectiveness of the anticipated QE2 program are all over the lot, but some interesting things are developing around this controversial event.
This week, the Fed actually solicited advice from the primary dealers in Treasury bonds—primarily the big banks and investment houses—about what to do and how big QE2 should be, which is scary in itself as one has to wonder why the Fed hasn’t already figured this out. However, by their own admission, the Fed isn’t sure if this is the right course, what the effect might be, or how they will eventually unwind all of this quantitative easing when the time comes.
Effectively, we are all participating in some kind of high-risk chemistry experiment conducted by “Bailout Ben” and his cohorts, and all we can hope at this point is that the whole thing doesn’t blow up in our faces.
Furthermore, in what is truly a shocking development, Reuters and other major news outlets reported that Bill Gross, head of PIMCO and manager of the biggest bond fund in the world, wrote that the US central bank’s bond purchasing program was “Somewhat of a Ponzi scheme.”
While all bets surround the Fed, we also see ongoing dangers from “foreclosuregate,” and Bloomberg reports that Bank of America, Wells Fargo, JPMorgan Chase, and Citibank face large exposures in second or junior mortgages that could run as high as $425 billion and could be at risk if and when the senior or first mortgage defaults. With 4.2 million homeowners “seriously delinquent” and 10.9 million homes “under water,” you can get the magnitude of this potential disaster. In some cases, the banks have potential liability nearly as large as their total equity.
And, inconveniently, Richard Cordray, the Ohio attorney general, appeared on Bloomberg Television, and regarding Wells Fargo Bank and the foreclosure problems, said, “These people think they can play by a different set of rules,…It’s not just individuals who signed flawed affidavits. It’s a business model designed on fraud….it will not be enough for them to say they have made a mistake. Wells Fargo needs to realize they have a serious problem on their hands.”
What It All Means
We continue to live in this financial haunted house, and who can know when the next boogeyman will jump from the closet. We face ongoing problems in the credit and housing markets, the technical indicators point to a market filled with high risk, and QE2 is ready to set sail on an uncertain course. This week promises to be at least volatile and possibly ghoulish as we find out if the week will be one of “trick” or “treat.”
The Week Ahead
I can’t remember a bigger week with the midterm election, the FOMC announcement on QE2, and a raft of important economic reports including the monthly non-farm payrolls report on Friday.
The markets have been treading water for a couple of weeks now, and almost certainly, that will come to an end this week.
0830: September Personal Income, September Personal Spending
1000: October ISM Report, September Construction Spending
0730: Challenger job cuts
0815: October ADP Employment
1000: October ISM Services
1000: September Factory Orders
1400: October Auto/Truck Sales
1415: FOMC Rate Decision
0830: Initial Unemployment Claims, Continuing Unemployment Claims
0830: October Non-Farm Payrolls, October Unemployment
1000: September Pending Home Sales
1500: September Consumer Credit
Winners: Software, Taiwan, Silver
Losers: Home Construction, Sweden, Turkey
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