No Confirmation

Tuesday’s market action was in some respects a mirror image of Monday. Where the SPX began the week with a gap down at the open and a steady ascent to finish at the daily high, Tuesday began with a gap up and a steady descent to finish near the daily low. The close on the Dow, which we don’t really follow here, was beneath the symbolic 10,000 level, so it merits a passing mention. The confirmation of support we looked for in Monday’s comments just hasn’t appeared (another technical note: the “hammer” candlestick previously mentioned was due to a bad tick on our favorite charting site – there was no hammer Monday).

Staying with the SPX technical picture a moment for Fibbonaci fans, we note that the late rally from March 2009 to April 2010 was very nearly an exact .618 retracement of the move from the 2007 high. The exact number would have been 1216.26 and we topped at 1219.80 – that’s close enough for me. You don’t want to know where the next projected move would take us; it’s simply too horrible to contemplate, and too unlikely to happen.

Across the waters, Dave Fry notes a double top pattern in emerging market stocks, and I will add that the developed markets showed a less defined, sort of rolling top as well. All these technical indicators suggest stocks have a tough road ahead. On a more hopeful note, however, Chinese stocks do appear to have found some support at the current price levels, and they have been a leading indicator of sorts.

Unlike stocks, commodities have taken a breather at support, with crude oil remaining comfortably above the $70 mark after punching all the way down into the $67 range. Let’s see if that support holds. If it does, I will be a buyer in spite of leaning toward deflation in the “great debate.” As usual in recent weeks, there is a continuing bid for the US dollar, and Treasury bonds across the maturity curve, while the Euro continues to be sold. Elsewhere in bond land, US investment grade corporates are holding up nicely, while lower grades have sold off some. Another variation on the risk aversion theme.

With the previously unthinkable prospect of developed nation sovereign credit risk now in full view, it may be quite reasonable to think of cash flows from high quality corporations’ bond coupons and stock dividends as a safer long term bet. On the other hand, we should never underestimate governments’ ability and willingness to get their hands on other people’s money.


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