Thursday, January 21, 2010

Fears Overblown?

Wow... What a difference a couple of days can make. On Tuesday, the SP500 closed above 1,150 signaling a potential breakout to 1,200-1,250. Then Republican Scott Brown won the Senate seat in very Democratic MA suggesting that the market would see the breakout rally. Guess what? At the same time that Brown was giving his acceptance speech, news was leaking in China that some banks were requested to stop lending for the remaining of January. Any since China seems to rule the world economy and not the US anymore, the market got spooked an so after 2 trading days the SP500 is barely above 1,115. Now its on the verge of a breakdown signaling the possible correction is finally here. Its seems that everybody is already on board with the drop so that gives me hope that we'll pull out of this tailspin.

Pisani has a good article on CNBC regarding the issues:

Oh, calm down. Worries about an imminent correction are a bit overblown, at least at this point.

The S&P 500 hit a 15-month high of 1150—on Tuesday! It is currently trading at 1125*, which is a decline of 2.1 percent from its recent high. (closed just above 1115)

*(as of this writing.)

A correction is a decline of 10 percent—the S&P would have to drop to 1035 to be in that territory.

There are two reasons for the decline today:

1) nervousness over the Obama speech at 11:40am ET is hurting financials (See Art Cashin: Bank Investors Are 'Worried' Now); (seems way overblown as Obama has a lot more bark then bite. Besides this regulation isn't going to cost these banks money. In fact, it'll likely unlock value as banks like Citigroup and Bank of America are 2 Big 2 Understand anyway. Most financial institutions aren't impacted.)

2) continuing selloff in materials, energy, industrials (global stocks) on a belief China will soon be raising interest rates to cool off their economy. (so what? It'll take more then a rate hike 2 months from now to slow down that economy in 2010. Did the market rise when the Fed started easing in 2008? No! It took a long time before the easing had an impact)

China's GDP grew at a 10.7 percent rate in the fourth quarter compared to the same period a year ago. Deutsche Bank told clients they believe China will likely hike interest rates in the second half of March.

Philly Fed much weaker than expected (15.2 vs. 18.0 expected) may also be a factor at the margins.


As you can see we have great issues with this being anything but a technical failure of not breaking the 1150 mark on Wednesday. The $NYMO indicator is down to -49 which is the lowest level since early November. Clearly suggesting an oversold situation already. Could get worse tomorrow though. We'll see. Also the Yield Curve remains very positive and will remain that way until the Fed raises interest rates at least 100 to 150 basis points. The chances of a major market correction seem unlikely until that happens and that isn't going to happen with Fear in the markets.

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