The Deceleration of the World Economy

STOCKS:

The Fed “Twist” remains in place, with the prospect for QE-3 ultimately coming to fruition as several top FOMC members want it. Now, the European debt contagion is growing, and the world economy is decelerating — including China, which did lower the reserve requirements today for the first time in 3-years. Collectively, given the bearish sentiment extant...should allow stocks to climb the Wall of Worry in the weeks ahead in a Santa Claus rally.

STRATEGY: Technically speaking, the S&P 500 has regained long-term support at the 45-mema at 1190; which is critical given it delineates bull & bear markets. Moreover, the resultant strength should allow for a test of the previous highs at 1293 will be challenged, with the potential for even higher highs to develop by year-end.

ASIAN BOURSES ARE STRONGER; BUT EUROPEAN BOURSES HAVE WEAKENED AND TURNED LOWER OFF THIS HIGHS: Once again, the Germans seem to be at the heart of the downturn from what were respective European stock market gains this morning. At the heart of the situation is that the German government “opposes” combining the Eurozone’s interim bailout fund, the EFSF of €440 billion ($593.1 billion), with the permanent European Stability Mechanism of €500 billion euro. A German official told reporters in Berlin that it has already been decided that the ESM will take over from the EFSF at an appointed time. Merkozy has been urging other fellow European leaders to agree to bring forward the launch of the ESM to 2012 rather than from the previous launch of 2013.

This type of dissonance in Europe has a clear impact upon the capital markets; they don’t want to see any of it, and if they do – it is a lease to sell the Euro and stocks and commodities follow lower as the majority of market participants just don’t see the Europeans getting this plan together. We beg to differ, for the alternative will be far worse. And while the agreements made will be distasteful they are necessary.

That said, we are following the Euro rather carefully on an hourly basis, and we are “hearted” from a long perspective that a rather bullish “head & shoulders” bottom is forming. Current prices are at 1.3370, but neckline resistance stands at 1.3550 – hence all that is required is a move of 180 pips to breakout of

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this bullish formation. If so, then the target measures to 1.39…which just below the declining 200-day moving average. This should push the S&P 500 sharply higher through the April highs towards the 1370-to-1400 zone by year-end. Therefore, we are putting greater emphasis upon the Euro trade than we have in past weeks, for it has been the tail that wags the dog primarily.

TRADING STRATEGY: We are long, and we are getting longer again today as the S&P 500 is attempting to breakout above its 200-day moving average. Make no mention that the NASDAQ 100 has already done so; make no other mention that the Dow Industrials and Dow Transports have done so as well. It is only a matter of time before they are regained. Today, we are buying two additional positions: US Steel (X) and Agnico-Eagle Mines (AEM).

To read the entire report please click on the pdf file below.