Will New Trading Range Stick?
Good Monday morning.
We begin the week with a few very simple premises confronting investors:
• Will the Europeans resolve their own credit crisis?
• Have stocks entered a new trading range?
• Are fears of a US recession overblown?
Europe: The news out of Europe was surprisingly bad: Lots of bickering and infighting over resolving the Greek problem. Regardless, European markets opened higher across the board (they gave back most of the gains as of this writing). The Euro Summit failure was offset by signs of growth in Asia — both in China and Japan.
Equities: Regardless, the market reaction to no resolution is quite telling. A month ago, this news would likely have brought a 3-4% drop in European bourses, and a 250 point drop in US equities.
Broader US equities may be entering a new trading range. As we discussed Friday, the S&P500 broke out of their prior 3 month range. It is noteworthy that while the Dow, Nasdaq and SPX have managed to rise, the small cap Russell2000 is still mired in its trading range.
Recession: Funny what a strong rally does; the increasing drumbeat of recession possibilities — from ECRI to the Fed chief himself — seem to have been muted.
I am far less enamored of markets as a savvy forecaster. Its track record is spotty at best. Our recession expectations remains better than 50% over the next 18 months.
Why? Its the Jobs, stupid!
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October 24th, 2011 at 8:05 am
[...] Barry: Will the new trading range stick? (TBP) [...]
October 24th, 2011 at 8:38 am
Krugman (last graf) : ‘The bitter truth is that it’s looking more and more as if the euro system is doomed.’
http://www.nytimes.com/2011/10/24/opinion/the-hole-in-europes-bucket.html?pagewanted=all
October 24th, 2011 at 8:42 am
1. No, but thy will try to make that impression. I expect a very large headline number and a complete lack of credibility/details. The markets will rally anyway in the short term, unless they completely fuck this up (they are obviously capable of fucking it up , but I actually think they’ll avoid a complete disaster this time).
2. Maybe. See point nr 1.
3. No. The probability of recession is rather underestimated. I think the US is more likely than not to enter recession. I am basing this on the Hussman Recession Composite and the ECRI’s data. This does not in itself negate the possibility of a new trading range and a violent bear market rally to end 2011.
Bottom line: When the fundamentals are lacking (as I think they are), let the trend be your friend. Wait for the market to break out decisively, then follow.
Grow up to be followers, not leaders :)
October 24th, 2011 at 8:58 am
The market doesn’t care about recession because first there will be another QE announcement before the end of this year. The size of QE will be massive. A “bazooka” type QE, “the QE to end all QEs” that will cause a massive speculative rally. Then comes inflation. Then consumer retrenchment. More layoffs. Net job loss. FOMC will look and sound stunned again. Then recession…. But not before another 25% stock rally!
October 24th, 2011 at 9:46 am
When the central bank runs the most inflationary monetary policy in US history (and I mean both CBs of the US, the FED and the PBoC) you may get both: A recession and a boom of some assets in nominal terms. When purchasing power of money fades in the face of negative real interest rates very strange artifacts may be born from asset valuations (believing in CAPM or not).
October 24th, 2011 at 11:56 am
The recession fears are overblown; the trading range may persist for about three months but then will be left behind.
October 26th, 2011 at 7:23 am
[...] the 3 month trading range at ~1220-25 last week suggests more upside from here, assuming the new trading range sticks. The playbook calls fro a pulback and test of the breakout — a great entry point — and [...]
October 28th, 2011 at 9:20 am
[...] S&P and Dow break free of the range they had been mired in for 3 months. The breakout seems to have stuck, and barring any catastrophic reversal, we should be in rally mode for a short while. Well I [...]