Lack Of Progress In Budget Talks Puts World Markets On The Defensive
Richard Rhodes | Nov 28, 2012 01:31PM ET
STOCKS:
The European debt contagion has been “kicked down the road” as Spanish and Italian short-and-long term bond yields have moderated recently given the ECB “plan” to buy bonds of up to 3-years in maturity...but only if asked; and only if conditionality is imposed upon those asking. The Fed has also changed its game from “inflation-fighting” to “unemployment fighting;” and with any war — they will go further and farther than anyone believes in printing money to achieve their ends.
STRATEGY: The S&P 500 remains above the 160-wma long-term support level at 1249. The much followed 200-dma support level stands at 1383, and was regained in bullish fashion after the previous Friday’s bullish key reversal higher. Collectively, this is bullish for a test and likely brekaout above the recent September highs at 1475. We want to be long of gold, energy and materials at this juncture, and we adjusting our positions this morning to reflect this.
WORLD STOCK MARKETS WERE ON THE DEFENSIVE Wednesday morning as comments from US Senate leader Reid has riled the markets. This began Tuesday afternoon around 1:30pm when he noted that there was a lack of progress in budget talks; and it continued into yesterday morning.
Quite simply, Mr. Reid is playing politics of course, for there are both high level and low level meetings taking place on a variety of plans to avoid the fiscal cliff. We do believe they shall do so; and therefore the markets will take the news of a deal positively. But just how positively depends on the type of deal: a stop-gap deal will be positive, but not as positive as a “grand bargain” that seems to elude lawmakers.
And with the S&P futures down by -5 points to 1392 yesterday morning, we have an opportunity to gauge the strength of the underlying trend. If prices can work off today’s weakness, or simply “stand in place,” then the correction to alleviate the short-term overbought condition is rather healthy and ongoing. We won’t expect to see the futures trade much lower than the 1382 level in the days ahead before a rally materializes; in terms of the S&P cash – it has major support at 1390.
Outside of this, Tuesday we illustrated the Spanish Madrid General Index and the probability that it has indeed it its lows given the 200-day moving average breakout, and the formation of a minor bull flag and a major head and shoulders” bottom formation. For these patterns to kick-in, then the rally needs to extend. And if it does, it may be due to the fact the EU has approved Spain’s bank restructuring plan, which opens the door to €40 billion to facilitate the restructuring.
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There are estimates of Spain’s banks needing additional funds; and we can generally agree on this. However, this initial €40 billion will buy additional time to figure out whether this is the case or not. Baby steps are a way of life in the eurozone…period.
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