First and Goal for Risk
We asked last week if the S&P500 (our proxy for risk markets) was capable of clearing the “red zone”, the zone of resistance between 1175-1195, which included the 50-day moving average. The market’s answer? Like a hot knife through butter!
Interestingly, the S&P500 closed at its high of the day at? 1194.91! Not a sold out crowd today as the volume was super light. Nevertheless, impressive. The bears need to take a goal line stance right here and push back the momentum or the next stop is S&P500 1230, the top of the recent trading range which began with the August collapse.
We have posted several pieces on the three macro bears that have been weighing on equities: 1) Europe’s sovereign debt and banking crisis; 2) The slowing of the U.S. economy and employment problem; and 3) China hard landing concerns. We’re not sure — and have our doubts — all three bears have gone into hibernation for the winter, but they do appear to be, at least, napping.
Today’s intervention to support the banking system by the Chinese government was a big, yet under appreciated, catalyst for the rally, in our opinion. The FT writes,
Central Huijin, the domestic arm of China’s sovereign wealth fund, will purchase shares in Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the official Xinhua news agency announced on Monday. Xinhua added that the purchases by Huijin – its first such public intervention since a similar decision at the onset of the financial crisis three years ago – would “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”.
The announcement came too late for the Chinese stock market, which had closed at a 30-month low, but had an immediate effect on late trading in Hong Kong. ICBC’s Hong Kong-listed shares, which had been down 3 per cent, rallied to close up 1 per cent.
The U.S. economic data looks to be improving and Europe has a plan to have a plan to recapitalize the banks and fire break the contagion of a Greek default.
We’re always flying blind with China due the country’s lack of transparency, but the equity markets have been hammered over there and should rebound on the intervention news providing more confidence for the global markets. The announcement of intervention came after the market closed but Asian ETFs were up big in New York trading.
The U.S. data, including Friday’s employment number, are not great, but beating to the upside. The key now is for earnings to confirm the U.S. economy is not sliding into recession. Company outlooks are more important in this season than almost any we can recall.
We’re most worried about Europe. There is more time for the markets to continue to hope as the E.U. summit meeting has been postponed to October 23rd to give policymakers more time to hammer out the details. They really need to get this right.
A big commitment by a national government to backstop its banking system could have adverse consequences for the sovereign’s credit rating, which negates the positive contribution of the recapitalization. This destablizing feedback took down Ireland and the worries seem to be the biggest point of disagreement between Merkel and Sarkozy.
The markets aren’t focused on these concerns and want to believe the three bears are hibernating for winter. They want to rebound from the August collapse like a beach ball held underwater. And that they are. Stay tuned.
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October 11th, 2011 at 1:15 am
Excelsior!
October 11th, 2011 at 1:51 am
The S&P has now rallied nearly 13% since last Tuesday at 3:10pm, or 4 trading days and change. It is now down only ~13% from its year high.
Call me a member of the lunatic fringe if you are so inclined, but to me this extraordinary move smacks of market manipulation. Recall that it started with a 4% gain in 50 minutes of trading to save the market from a bear market close. A convenient and well-timed move to be sure.
And really, is market manipulation so ridiculous a charge in this environment? Ben Bernanke has made it abundantly clear a main goal of the Fed is to increase the value of the stock market, and he cares not for valuations. Today, China openly bought domestic equities, something Japan has done in the recent past.
There is no market any more. There are only competing manipulators, many of them government operated/sponsored. Price discovery is dead. Fortunately I’m relatively young and can hope for a day when accounting can be believed again and the manipulation ends. But I pity the near-retired who have the choice of investing in fixed income for pennies or buying into the farce that is equity markets.
BTW, is it not amazing how gullible this market can be? It’s fallen for this “we have a plan to solve the Euro crisis” line about a trillion times so far. Are participants really so stupid as to believe all that’s required is a wave of the magic wand by Sarkozy/Merkel and all will be well? It’s really something to behold.
October 11th, 2011 at 4:38 am
I heard somewhere that China was offering to come to Europe’s assistance by providing additional capital. That would be a great big joke. China has been exporting Capital for years and years. It’s part of the reason the West has this huge problem. In addition I reckon intervention by China in its own financial markets is also a great big joke. It implies that they don’t already intervene. Of course they intervene like hell. The problem for them is how to intervene in a way that does make the situation a whole lot worse. Of course the same applies to all the central banks. IMOP the chances that more asset price destruction can be avoided are slim. Then again I have been known to be wrong for long periods at a time.
October 11th, 2011 at 5:50 am
EMA(409) and MA(322) are crucial resistance to overcome at SPY 120. The close yesterday looked like a mini-short squeeze on light volume. European action this morning suggests that 120 and these two moving averages may be a top after over two months of volatile and choppy action which could not clear these levels on decisive volume.
October 11th, 2011 at 6:44 am
So much for homeland security:
http://news.yahoo.com/ap-impact-foreign-insects-diseases-got-us-070735077.html
Some reading to give you pause:
http://guymcpherson.com/2011/10/emotional-morons/
October 11th, 2011 at 7:31 am
It looks like some kind of tape painting to me. You need fuel, animal spirits, and volume to support a rally of any length. The tape painting is being done by HFT programs and, my paranoid mind suspects, some capital or puts from somewhere special in order to pump the markets to a high enough point so when Greece fails the drop will only be to the recent lows or slightly below. There are NO animal spirits nor is there any glorious volume that would depict underlying strength. Besides, a serious rally would also raise the price of oil etfs, and, in tandem, the price of oil, and crush the economy further.
It’s good enough to fool the media and pundits and sell siders in need of a sales point. I really want to get in at a low, or even at a mid point that is on a line that is going up at a respectable slope. This is just phony, but it’s probably good enough to fool the average stocktard.
October 11th, 2011 at 8:18 am
Shanghai market rose 3 big points on the announcement
Gov. fund manipulating the market only scare ppl, what do they know that we don’t? If the government is concerned, shouldn’t we?
October 11th, 2011 at 9:17 am
what dh said .. big picture I don’t see folks with spare cash air to pump up the ball .. so any and all savings air will be withdrawn as one generation retires and another is realizing their infussion of air is going out a hole in the back
October 11th, 2011 at 9:49 am
Too many bears, me included. Put/call has been relentlessly high for many weeks like I’ve never seen it before. I still believe in the recession call but I suspect we’ll be seeing more of a green shoots psychology driving the market until more bears jump ship.
October 11th, 2011 at 1:10 pm
How is a beat to earnings when the earnings bar has been pushed down and down and down…..
Does anyone have a plot of the SP V earnings expectations in the last 90 days?
:)
October 11th, 2011 at 8:14 pm
Could it be that all the bearish sentiment, as confirmed above, is a contrary indicator. SP shorts are also at record highs (Based on the number of borrowed shares) which could set up an epic short squeeze?
October 11th, 2011 at 9:04 pm
I’ll go with Concerned Neighbor’s post
October 12th, 2011 at 2:13 am
Me to, I’ll go with Concerned Neighbor’s post.
First and goal…..I see a field goal followed by a kick of return for a touchdown!