Finally after talking about it for the past two weeks we got our monster bear market rally on Wall St. Tuesday's rally was one of the biggest in history with both the Dow and S&P 500 gaining about 6%. From our 1-March blog post:
It's my opinion that the Dow, S&P 500, and S&P 500 futures have either overshot the downside or are nearing the overshoot point; the exhaustion point. As a Forex trader, the last thing I want to be is caught short on the EUR/USD or EUR/JPY when Wall St. decides enough is enough and we have a violent 320-point bear market rally on the Dow. I believe that moment is now due and could come when least expected.
When I woke up early this morning that paragraph above was the first thing I thought of and the only thing I could think of, so the next thing I did was walk over to my computer and post in the chat, "do not short the euro"... that's all my barely functioning brain could communicate at the moment. Within a few minutes the EUR/USD was on it's way from the 1.2600 level to 1.2800+. The EUR/JPY ran all the way up over the 126.00 level.
The price action and behavior in all correlated markets has been chaotic to say the least. In less than 24-hours the S&P 500 futures went from the 672 level to the 722 level, spot crude made a run over $48 before profit-taking and short-sellers pushed it back to the $45 level while gold has continued to be brutalized. Since the market opened on Sunday spot gold has gone from the $940 level to the $892 level, and the 10-year yield surged to the 3.00% level by late Tuesday.
Sucker rally?
Inevitably the Dow's 379-point gain has sparked talk of "the bottom". I'm not calling any bottom on anything based on today's move. I've been expecting this rally, it's come as no surprise, but nothing was actually fixed today.
I think all rallies like today are purely psychological in nature, and it didn't take a genius to see it coming... I figured by the beginning of this month those market's had overshot to the downside and within days market participants would get sick and tired of the beat downs, and all we'd need is a trigger to get the euphoria going again.
The story goes that early this morning Citi CEO Pandit made a comment that Citi was profitable for so far in 2009. Then later in the afternoon market participants were further bolstered by comments from Barney Frank about the uptick rule being reinstated for equities.
Citi better be profitable, all those banks better be profitable... they are borrowing taxpayer money from the Fed at 0.00% and then lending it back out to other institutions and consumers. You'd have to be a blithering idiot to borrow money at 0.00% and not make a profit on it. Citi is still charging some of their credit card clients 28% accruing interest. If I could borrow money for free and lend it out to somebody for 28% interest, I better be reporting a profit on my balance sheet, give me a break.
I'm not impressed with Citi being able to make money because if they can't make a profit after borrowing money for free and lending it back out not for free, they deserve to be taken to the field and shot.
And then we have Barney Frank who played queen for the day by telling the markets he thinks the uptick rule will be reinstated within a month. Message to Barney: you don't have any power to reinstating the uptick rule. In case you don't know what the uptick rule is, it says you can only short a stock on an uptick, not when it's tanking which is supposed to stop bear raids on stocks.
So, as I see it, we have two weak catalysts for today's bear market rally which was due anyway. For me I need to see follow through tomorrow... I need to see the short-sellers sit on the sidelines and let the bulls run wild. I need to see Asia and Europe go nuts and then for Wall St. to build on its gains... I need to see some of this so-called "money on the sidelines" we've been hearing about get off the sidelines and back into the game.
The other day I said gold's sell-off could be a great sign for equities bulls if gold's downside was due to profit-taking followed by those gold profits going into equities. I believe we saw that exact scenario play out on Tuesday because within the price action I could see profit-takers hitting spot gold and moving money-flows right into the S&P 500.
As long as this euphoria hangs in the air I'll caution all traders not to get stuck in a euro short at the moment. Should these markets run up again they should take the euro with them just like we saw this morning. I'm still bearish on the EUR and JPY, that has not changed, but I have to trade the short-side defensively, not offensively.
Wednesday will be another fun day on Wall St.
EUR/USD:
The euro's high was right on my 1.2823 key level and was clearly rejected at that level. One of our traders in the chat pm'd to tell me there was some big moving average around that level, so obviously we had tech traders factoring into the mix. The only reason I put a key level at 1.2823 was because I knew tech traders who were shorting the euro would have their stops set right on 1.2820, that was pretty easy to figure out and the banks and brokers would want to take out those stops this morning.
The run up failed after stops were hit and we dropped all the way to the 1.2630 level at the end of the NY level before recovering back towards the 1.2700 level as I write this commentary. For almost a week the market made attempt after attempt at breaking below the 1.2580 level. Each attempt was rejected and I believe for now we can call that level solid support.
There are some unknowns for the euro, dollar, and yen over the next 24-hours because we don't know if Wall St. will follow through today's rally. I think Wall St. holds the key to it all, at least that's how I see it in my mind.
On Tuesday we saw some abysmal fundamental data out of Germany and France, and on Wednesday we get key data like German PPI and German Factory Orders. I'm not sure the markets will be trading on any kind of fundamentals on Wednesday, but if they do and German PPI prints below the -0.1% level the euro could be in trouble. Reason being, a print too far into the negative on PPI could spark fears of deflation, and that's a beast these markets don't have the mental strength to contend with right now.
Deflation--
Deflation keeps the UK and Eurozone at risk in my opinion. The more levered up an economy is, the more they will deflate when everything unwinds like it's doing now. Massive asset liquidations and margin calls and loan calls continue to happen in the financial markets on a daily basis and that is all very deflationary I believe.
Loans that were made with cheap USD are being called and when loans made in USD are repaid, this will give the USD a boost. Remember the so-called "unwinding" of the yen carrytrade? All that was just a situation where loans made with cheap JPY were getting called and repaid back, giving the JPY massive strength. The endless supply of cheap JPY that flooded the money markets made the JPY repayment process extremely painful for people long on the yen crosses, same with people short on the USD.
I think there are more USD loans and debts that need to be repaid which keeps the USD in a somewhat position of strength against the EUR and from potentially breaking new highs on the USD Index. When these loans are repaid and the margin calls stop, that's likely when the USD will turn into the next carrytrade because it's essentially worthless now thanks to current central bank monetary and government fiscal policy.
This is all part of the deleveraging process and I think Europe is not through unwinding their levered up positions, which puts the euro at risk in the near-term. All of the fundamental reasons are there for the euro to die but because of the strong EUR/Equities correlation, it's holding the euro back from the sell-off it deserves.
That's about it for now. As far as trading goes, if I get a decent euro long probability I will likely take it. I may also play the short side when this current up move exhausts but I caution against euro shorts for the next few hours, it could make a move up. Key levels will be posted after London opens tomorrow.
I'm much more enthusiastic about this week compared to last... the combination of an ECB rate decision and NFP always complicates trading. On Monday the markets will open having been heavily sold-off the prior 4-weeks. On Friday equities bears covered their short positions, sending theDow and S&P 500 on surge the last hour of trading. As soon as the profit-taking and short-covering hit, the S&P 500 futures ran up 20-points which pushed the EUR/USD just below the 1.2650 level at the close.
Historical crisis:
This current recession in the US, which is now global, is unlike anything the government or Fed has had to deal with. History is being written on a daily basis. They say history is destined to repeat itself and this is true, but history is in the making as well. This recession combines elements of recessionary years like 1929, 1933, 1980, 1982, and 1857.
One reason why I think this recession is a beast of its own centers around the financial health of Americans. The recessionary years of 1980-1982 resemble this recession in terms of the unemployment situation. By 1982 the US Unemployment Rate was 10.1% but the US Savings Rate was 12.2%.
10% unemployment in a consumer-driven economy is a dire situation but manageable when consumers have some disposable income in the bank and limited household debt. As soon as a bad economic situation looks better those consumers start spending again, they have the money in the bank to be consumers. According to the textbook definition, the current recession began in December 2007. When this recession began the US Savings Rate was under 1.0% which is far from the 12.2% average in 1982. This go around, there is no money in the bank.
The other problem lies within what's called the household debt service ratio. It's basically consumer debt. According to the Fed's statistics on this data, here's what the household debt to personal income ratio looks like from a few selected recession years:
There's a big difference between household consumer debt of 10.58% of personal income when the average savings rate is over 12% compared to debt to personal income of 14.08% with almost no savings at all.
That factor alone makes this recession different for consumers, retailers, and all those banks who are creditors to US debtors. The average US savings rate is going up, it's well over 1.0% currently but this is a new phenomenon forced on American consumers against their will. They have no other choice but to stop spending because there isn't much to spend, their credit cards are maxed out, and their personal ATM's (homes) are upside down.
I'm not listening to anybody that believes they can find a bottom to this recession, equities markets, unemployment, housing, you name it. Good luck trying to find a chart from a random prior recession to compare to what's happening in March 2009. Maybe when everybody stops talking about the bottom we'll finally get the bottom.
In my opinion what started in 1856 and erupted in 1857 is what's most comparable to the 2008-2009 recession. The Great Panic of 1857 which led to a steep recession had all the elements of this one... bank failures, extreme global currency price fluctuations, a real-estate boom and bust, devaluation of homes and land, geo-political events like the Mexican-American War and the Crimean War.
The 1857 recession that started in America first spread to Europe, then to South America and Africa, and then Asia caught it last. The global network of economic trade that existed back then collapsed, government debt defaulted, commodities collapsed, and general panic and fear reigned. Sound familiar?
Our recession has all of those elements from 1857 but on a much more intensified scale. The world is much smaller now than it was in 1857. The prior major recessions like those in the 1930's, 1970's, and 1980's didn't combine all the elements we see now and 152 years ago. The situation in 1857 developed into a "war with wealth" and ultimately led to the South succeeding and forming the Confederacy... then it was Civil War and you know the rest of the story...
The third week of March in 2007 I put out a forecast that the US housing market would collapse within 6-months. A current admin in our chat was one of the first to show me interesting information on sub-prime back then right after I started talking about the end of the US housing boom. He knew it was coming, several saw it coming but few wanted to listen.
I think the recovery will begin within a year. The only reason why I believe this is because I just saw something on CNN about how they are going to help Americans survive the recession. CNN aren't the only ones... I think it's safe to say when CNN, Fox, and MSNBC think they have any clue, we've probably hit bottom or we're close to it. Those people must be crazy if they think anybody is actually going to take financial advice from TV news entertainers.
Wall St.:
Last Friday was chaos on Wall St. After the jobs data was released the bottom fell out of equities as the Dow pushed below the 6,500 level while the S&P 500 fell below the 670 level before recovering at the end of the day thanks to profit-taking.
A few days ago equities had a pathetic relief rally but every day the Dow and S&P 500 get further driven into the ground the closer we get to a violent bear market rally. There's no way to predict what triggers those bear rallies and it's impossible to see them coming ahead of time, but when they erupt out of nowhere you don't want to be caught on the wrong side.
Last Friday I took a loss on a euro short mostly because I'm guarding against being caught short on the euro when Wall St. decides to go mental and run up several hundred points. From a pure risk management view, I'd rather short the euro at the end of a bear rally compared to being short when it begins... we've seen a few bear market rallies towards the end of 2008 that send the EUR/USD up in excess of 320-points over a span of just 12-hours. Being caught in a situation like that is terrible on the mind for a trader.
I'll keep taking manageable losses to prevent my account from being caught in a painful situation. A loss like that is very easy to manage compared to being in several hundred points of drawdown and waiting for the market to crash once the bear rally fizzles. The bear market rally that's due may have started on Friday, we don't know. But what we need to now look for is either follow-through or failure on Monday.
The tight EUR/Equities correlation makes it hard for euro bears like myself to trade the euro as it should be traded because the euro can't do anything but go up when equities go up. It doesn't work any other way right now. That being said, I believe the the Dow and S&P 500 ultimately need to go lower, which will drag the euro down with them.
Back on Dec. 16, 1982, at the height of the last major recession, the Dow was at 990.25. When adjusted for inflation, that would put the price-weighted Dow index at 2,120 today. Right now the Dow is several thousand points above that equated level so I'm certainly not ruling out Dow 6,000 or lower before it's all said and done. When you factor inflation, the Dow is currently trading at 1966 levels.
Fear can become a bubble too. What typically follows fear is euphoria. Once perception changes, fear switches to euphoria and markets go on monster rallies. Perception is reality and as soon as a piece of news, data, or geo-political event triggers that mental switch, the fear bubble bursts and Wall St. goes on a violent rally, bringing all other correlated markets up with them. I don't want to look like an idiot being caught on the wrong side of that move so I'll continue to trade accordingly.
Treasuries:
Treasuries will come into view as there are several major auctions, including a 10-year auction that will be watched closely. The 10-year went on a strong bull run last week as equities melted down. The 10-year yield dropped 14bps, the most since last December 19th.
This week $63 billion worth of new US debt will be auctioned. The Treasury auction's a record-breaking $34 billion in 3-year notes 10-March, $18 billion in 10-year notes 11-March and $11 billion in 30-year bonds 12-March. The Treasury is looking to sell at least $2 trillion in debt in a short period of time to fund the federal government's balance sheet and keep the Fed bailouts pumping.
Heavy money-flows back into Treasuries will hurt equities, the euro and should send the dollar higher. What would hurt the USD would be any irregularities during the auctions, a sharp unexpected rise in Treasury yields, or speculation that sovereign wealth and other market players show a growing distaste for Treasuries.
Treasuries are the next bubble that needs to go, but the problem is Geithner needs a strong USD so America can pay their debts back as cheaply as possible and Bernanke needs a weak USD so inflation jump starts equities. This is a very difficult situation for all parties concerned...
Hillary Clinton has been on a world-wide tour begging sovereign wealth to keep buying US debt. It should be no wonder Clinton's first trip last month was to China. The Chinese have Geithner and the Treasury bent over a barrel right now, so does Japan. But, there's a whole lot more room around that barrel... it's not in China's interest to cause panic in Treasuries because that would weaken the dollar, which would weaken their debt-holdings position against the US. I think the Chinese are too smart for that, there are other ways.
With the Secretary of State wrongly claiming America's democracy is older than Europe's and telling the Russians she hopes they don't "overcharge the US" after screwing-up a translation on a gift, I hope all sovereign wealth stops buying US debt. It's disrespectful to say such stupid things. I'm not sure how America will gain any respect that was lost during the Bush regime with comments like that.
Keep an eye on Treasuries this week.
EUR/USD:
First of all, don't forget that NY is now 4-hours behind London and 5-hours behind Frankfurt. I think Europe has their time change soon but between then and now remember that new time difference.
Last Friday's job data printed at their lowest levels in 35-years. We don't need to get into all the specifics, it was ugly and it will stay ugly. I believe unemployment will at least go to the 9% level.
One piece of data I like to watch is what's referred to as under utilization. It's a different way to look at and measure unemployment. Right now the under utilization rate is 14.8% compared to the unemployment rate of 8.1%. The under utilization rate factors in people that gave up looking for a job, have a part-time job but want to quit, discouraged workers, part-timers who want to be full-timers but can't find the work, etc. It's a wide-ranging piece of data and I believe it shows the unemployment rate has room to rise to possibly 9.8% in the near-term.
I read a story about a school in Ohio getting over 700 job applications for a janitorial job that paid $15 an hour. Unemployment will get worse...
My forecast for the euro this week -- it'll do whatever equities do unless the strong EUR/Equities correlation decides to become unhitched and change this week. Unless we have a change in the tight price action correlation between the EUR/USD and the S&P 500 futures, the euro will go up and down with that index.
I talked to one very smart trader who's been shorting the euro and the S&P 500 futures simultaneously, making a nice profit. It's pretty much that simple if you can catch the right direction of the market at the right time.
Every trade day last week saw heavy volume selling on the S&P 500 futures. Can it repeat this week? Of course, but as with the Forex market, the longer things stay the same, the more they have to change.
Gold made strong gains on Friday after failing to break below the $900 level earlier in the week. One great sign I've noticed here recently is gold and the dollar have stopped rising in tandem. That's a sign some of the general panic is going away. If the EUR/Gold correlation goes back to normal we should then expect to see the euro and equities rise as the dollar and yen falls.
Crude appears to have put in a bottom at the $32 level. The next round of GDP data could send crude lower but overall this commodity looks able to sustain some upside gains in the near-term. This is also a great sign for equities and the euro. With some upside momentum pushing crude now is a great time for OPEC to make further production cuts and for some of those pipeline attacks to flare up again. Surely OPEC needs crude above $50 for budget reasons.
Fundamentally there is an enormous amount of key Eurozone and German growth, manufacturing, trade, consumer, industrial, and jobs data. For the US we have Retail Sales, Initial Claims, Trade Balance, and Michigan Sentiment. The beginning of the week is dominated with euro data while the end of the week is for the dollar.
Bernanke speaks:
10-March at 0830 EST
Trichet speaks:
12-March at 0730 EST
I'm nothing but bearish on the euro overall, that has not changed but as we've already discussed, until the strong EUR/Equities correlation breaks, I don't see how the EUR/USD can sustain the type of sell-off it deserves for fundamental reasons.
One of the interesting things about trading the EUR/USD is, I can make the case for both currencies to be sold-off but they are paired together like two brain-dead Siamese twins and currently under the spell of Wall St. Until that changes we're stuck with a EUR/USD that will continue making erratic price moves in the short-term.
I would expect the JPY continues to weaken in the short-term, especially if equities rally. A sustained crude rally should pressure bears on Wall St. to sell and may give the bulls a boost. A fundamental case for a weak JPY can easily be made.
I will be interested to see how the Trade Balance and Import Price Index prints. I don't ever see the Trade Balance turning net positive for the US and the USD. America doesn't really make anything any longer and according to China's latest import/export data, they are still outpacing America. Chinese imports in to the US are down but not nearly to the degree US exports to other nations are down, or German exports for that matter.
As far as trading goes I will continue to short the euro on the rises and rallies but I will be very cautious against getting caught short on the euro should a bear market rally break out this week. I don't trust the dollar, euro, Trichet, S&P 500, Bernanke, crude... I trust nothing at the moment.
One last thing... if I'm quieter than normal in the chat this week it just means I'm focusing on the markets and looking for trades or trading. The second week of the month is what I like best in terms of trading conditions, hopefully the volatility is there.
Finally, for all those wondering where some of AIG's $173 billion worth of taxpayer money is going, I have a partial list:
Goldman Sachs
Merrill Lynch
Morgan Stanley
Wachovia
Bank of America
Suntrust Bank
Deutsche Bank
Royal Bank of Scotland
Barclays
Lloyds Banking Group
HSBC
Societe Generale
Calyon
Rabobank
That's if for now. EUR/USD key levels will be posted after London opens on Monday. Be smart with your risk and money management this week.
Wall St. finally got its rally Wednesday... not a bear market rally but a classic textbook relief rally. The media says the market's got excited after hearing a rumor the Chinese plan on creating a new economic stimulus package of their own. That might be the story but the fact is, sellers were non-existent yesterday causing the relief rally for the Dow, S&P 500, euro, cable, crude, etc. Nearly all global markets were lacking sellers.
There's a huge difference between a relief rally and a bear market rally because the missing component between the two is buying power. The reason why yesterday's upside gains on the Dow and S&P 500 was a relief rally was due to the fact the intense volume selling disappeared and the profit-takers were in abundance.
In a bear market rally not only does the volume selling disappear and the profit-taking come in, but the bulls recognize what's happening and use the opportunity to pile in on the long side to use their liquidity to drive prices higher, trigger stops, and cause short-covering. What happened was a definite lack of volume selling pressure but also a lack of volume buying pressure to that replicated the type of selling momentum we saw Monday and Tuesday.
While the bears were taking-profit and removing short-side liquidity from the market the bulls mostly sat there all day and watch prices drift higher. There's clearly no groundswell of even slightly bullish sentiment on Wall St. The Dow and S&P 500 were perfectly set-up to make substantial gains on Wednesday and the bulls let their opportunity pass them by.
Right before Wall St. closed yesterday I made a comment in the chat about seeing how who had the nerve to hold their S&P 500 and Dow longs into the close... sure enough the S&P 500 sold-off right into the close with the futures falling from 723 to 702 in a matter of just a few hours. Traders are starting to get too predictable these days.
But with a new day we get a whole new set of challenges we need to contend with...
ECB:
As far as the EUR/USD is concerned the only thing that matters today is what happens at 0745 EST and 0830 EST. Trichet will take center stage as all global market participants watch and listen for any signs or clues for Trichet's bias on rates going forward.
My forecast is for a 50bps rate cut, dropping the ECB's key lending rate to 1.50% vs. the Fed's effective 0.00% Fed Funds Rate. Anything more or less than a 50bps cut is going to cause a considerable amount of speculation and panic in these markets and that would be a whole separate issue we need to contend with. I don't think Trichet is in the business of causing panic so we should expect that 50bps cut.
No matter what I think Trichet has to cut at least 50bps today. He has no choice because his precious Eurozone is crumbling under the weight of the global financial turmoil. His biggest producer, Germany, is in the midst of a sharp recession with no signs of letting up in the near future. All those forecasts I gave last year about the Eurozone falling into a terrible recession are finally starting to play out, it's just taken a little longer for Europe to catch up to the U.S.
I'm not sure how many traders realize this but the Eurozone economy is actually larger than the US economy when you break it down in terms of GDP valued in the US dollars. The Eurozone is (was) quite larger than the US in terms of GDP with Germany being Europe's biggest economy and the world's third largest.
Now they're screwed and Europe's in worse shape than many expect and some are admitting. Just this morning month-over-month German Retails Sales printed -0.6% vs. an expected 0.3%. I won't take the time to go through the laundry list of all the reasons why the recession in the Eurozone will get worse, there's plenty of that in past updates, but my point is I don't believe Trichet can say much to instill confidence in Europe. Trichet will need to really dig deep to find any bright spots in Europe. If he paints anything but a bleak picture he's lying.
Euro risk--
Potentially there is one thing Trichet could say that would send the EUR/USD on a free-fall -- any mention of a threat to European sovereign debt or a default in any European economy. Even if he say's something about a small player like Latvia being at risk of a sovereign default I would expect to see the euro drop sharply.
I'm convinced a default in Europe is on the horizon. I can't predict who or when but I feel like it's coming sooner rather than later. Europe is holding at least $22 trillion in the same exact toxic assets that made US banks and financial institutions insolvent and in need of a government bailout. Anybody that thinks Europe's banks will magically escape the same fate is either crazy or knows something I don't know.
If you're a trader, watch that Trichet press conference, it's an absolute must for today. If anything else, during the Q and A session you'll get to see a few emotional outbursts from the guy and that's always entertaining.
EUR/USD:
Today I'm nothing but bearish on the euro, bottomline. That doesn't mean I'm loading up on euro shorts in anticipation of today's ECB rate event. I still have an open euro short from the call we made last night but it will be closed for +1 in case the EUR/USD turns back higher towards the 1.2650 level.
So far in early London trading the euro is mostly under pressure and remains towards the downside. It's been failing above the 1.2624 level so far this morning but obviously we have several hours between now and the Trichet press conference.
The S&P 500 futures have continued to sell-off right through the Asian session and hover back near the 700 level. Crude won't quit and gold bears failed to send that thing through the $900 level after spiraling down $100 the past few trading sessions.
Wall St. has to contend with Initial Claims, Factory Orders, and another boring speech by Geithner. Wall St. will not likely open with the Dow and S&P 500 too much to the upside. It's possible the bears and the bulls are going to sit there and wait for the other to make a move today. Yesterday's relief rally ended up being pathetic as both equities indexes fell apart at the end.
I will post some EUR/USD key levels later on in the London session. So far we've managed to make decent profit this week in the midst of the chaos and I plan on trading again today. These conditions are here to stay and I enjoy the challenge, so we'll see what we can do.
VeriteFX--
Just a quick note on VeriteFX... we're officially launched now. I wanted to get a quiet start, not make a big deal out of it. Just after the first day we had over 100 traders as members and we're represented on every continent on earth except Antarctica.
Spread the word and let other traders know we're here and trading. We've got a great group of traders already settled in and things are going well. Traders that are new to the community or new to our style of trading should take the time to read the following links:
The VeriteFX trading community is free and open to all traders. If you would like to join us you can sign up here.
The blog is now open for traders to post comments and questions. If you have a question about something you read in the blog, about trading, the markets, etc. feel free to post and I'll do my best to answer in a timely manner. Any offensive crap or childish stuff will be deleted, we're not going to play that game. This is a professional trading community for the serious-minded trader.
That's all for now. Be safe in the markets today and use good risk and money management.
If you were hoping the start of a new month might make trading conditions a little easier and less chaotic, don't get your hopes up too high. I think March may turn out to be the most volatile and chaotic month of the year thus far.
I think we're due for some range breaks, bear market rallies, and surprise geo-political events for all correlated markets. Billions in cash reserves sitting on the sidelines since last year will begin feeding into overall increasing money-flows from global market participants.
I feel like market players want to take on risk... risk has been taken off the table for too long. Knowing the human behavior aspect of the markets, people with money will start to get impatient to see that sidelined cash begin showing a return.
This is an investors market but only to a certain degree. It's definitely a traders market, that aspect will not go away any time in the foreseeable future. But as we draw closer to the end of Q1 and the start of Q2, it is due season for banks and financial institutions to accept the new global market environment, adapt, and begin servicing their client base.
There's a reason dinosaurs don't roam the earth anymore even though they were some of the strongest beasts in the land at one time in history. It's just history though, right? A few of the old dinosaurs in the financial industry won't be around either no matter how much money the Treasury prints to keep them solvent. These are survival of the fittest times, every man for himself. Let those financial institutions cannibalize themselves or become nationalized by government, I don't care.
In terms of actual trading this week, it's a typical start to the month meaning difficult trading conditions thanks to back-to-back ECB interest-rate and NFP events. No matter what, the goal is the same -- end the week flat and in profit.
S&P 500 and EUR/USD:
Roughly two years ago I first started to look at the connection between equities and the EUR/USD. At the time I mainly focused on the Dow, I thought it was the most correlated equities index to the EUR/USD but as I was learning more about the EUR/Equities correlation I discovered the S&P 500 is the key index to watch.
Traders that have been with me for at least the past year already know how I trade using the EUR/Equities correlation but for the benefit of all, I think we need to understand the index in order to best utilize the strong correlation it has to the EUR, USD, and JPY.
S&P 500 breakdown--
Here's a simple breakdown that should explain why I watch the S&P 500 and why it's highly correlated to the EUR/USD and EUR/JPY:
It's the leading gauge of all US equities with a market coverage of 75% of all US stocks
Global market participants give the S&P 500 prime weighting as they construct their investment portfolios and make investment decisions
The S&P 500 index requires public float of no less than 50% giving the index far reaching affects in the institutional and retail side of all markets
Think about it... where are the three main centers of finance and have the greatest concentration of money-flows: United States (USD), Europe (EUR), and Japan (JPY). In my mind, if the S&P 500 is the pillar of the global markets and the top three markets are the US, Europe, and Japan, it's no wonder there's such a strong correlation between the S&P 500 and the EUR/USD, EUR/JPY, and even the GBP/JPY to a degree.
S&P 500 sectors and market weighting--
The ten leading sectors that make up the index are as follows:
Information technology -- 15.27% weighting
Health care -- 14.79% weighting
Energy -- 13.34% weighting
Financials -- 13.29% weighting
Consumer staples -- 12.88% weighting
Industrials -- 11.08% weighting
Consumer discretionary -- 8.40% weighting
Utilities 4.19% weighting
Telecommunications -- 3.83% weighting
Materials -- 2.93% weighting
The three sectors that matter most to us as EUR/USD and EUR/JPY traders are energy, financials, and consumer staples which combined bring almost a 40% overall weighting.
The ten leading companies on the index, broken down by overall index weight, are as follows:
Exxon Mobil -- 5.17% weighting (energy)
Proctor and Gamble -- 2.35% weighting (consumer staples)
GE -- 2.17% weighting (industrials)
AT&T -- 2.14% weighting (telecommunications)
Johnson & Johnson -- 2.11% weighting (health care)
Chevron -- 1.19% weighting (energy)
Microsoft -- 1.89% weighting (information technology)
Wal-Mart -- 1.60% weighting (consumer staples)
Pfizer -- 1.52% weighting (health care)
JP Morgan -- 1.50% weighting (financials)
The top ten companies in the three sectors we as Forex traders should be most concerned with carry a combined overall index weight of 12%. The biggest player on the S&P 500 by far is Exxon Mobil, which is obviously tied directly to crude and we know crude is tied directly to the EUR/USD and EUR/JPY.
Based on those annualized returns, even over a 7-year period it doesn't appear the textbook "buy and hold" strategy makes much sense. Treasuries have outperformed those numbers and typically Treasuries can be a terrible longer-term investment. The interest my bank pays me in my checking account consistently beats the S&P 500. Pretty sad.
Dividends on the S&P 500 are expected to decline 13.3% in 2009 which is the worst since WWII. Smart companies will make large cuts to their 2009 dividends if they want to survive this year. As of the end of February I think the S&P 500 is on pace for a 2009 annualized loss of -38.627%.
I'm not aware of too many traders that use the S&P 500 like we do to trade the EUR/USD but hopefully this make sense why I constantly say there's such strong correlations here and why money-flows in and out of these markets cause fluctuations in price for the euro, dollar, and yen.
VeriteFX update:
That commentary right above about the S&P 500 is more evidence for why I believe in a strong trading community. If it wasn't for a colleague telling me to look at the S&P 500 instead of the Dow I might still be looking at the wrong data... and then where would I be? Probably not as far along...
There's a ton of trading communities out there but this one's different not just because of how we approach the market but mostly because of all the traders that make the community and I think we have some of the very best here.
I gave a target launch date for the new community to go live on 1-March. It's not going to happen. I'm not going to launch it live until I'm happy with the way it looks and before I think it's ready to go. So for now we'll keep the 50 traders that are already in the chat going and hopefully before this Friday we can officially launch. If not this week at the very latest next Sunday/Monday. Being in the Netherlands for a week didn't give me any time to work on the site so I have some catching up to do this week.
The most important thing is making sure our SMS system is working 100%. I don't like SMS as a means of communication to deliver live trade calls but I at least want the SMS to get there as timely as possible. With a free gmail or yahoo email account a trader in almost any part of the world can now get our live trade calls.
Europe:
My trip to Europe yielded excellent results. Overall, the consensus from Europeans is a dark outlook on the health of the European economy and especially the banking system. One of the darkest secrets being revealed is sub-prime lending practices have taken place in Europe the past 5+ years. European banks are holding toxic sub-prime mortgages just like their American comrades.
Americans taught them sub-prime lending after their friends in Europe saw the profit potential of this new instrument created in the secret laboratories on Wall St. funded by backers in Washington DC.
If US banks can't escape the lethal effects of sub-prime, mortgage-backed securities, no-doc loans, commercial real-estate loans, and commercial MBS's, European banks won't escape the same fate either. Europe and America have the exact same problems but Europe and America can't use the same solutions. There is no Fed/Treasury set-up in Europe. It's like the same cancer requiring two different cures... that's how I see the magnitude of these issues and why it's all weighing heavily on the EUR/USD right now.
Many months ago I mentioned potential issues with old European pensioners. On my trip I found out there are pensioners in Europe right now suffering because their money was tied into highly-leveraged and ultra-risky investment instruments. I mentioned European bank failures... it's happening in Europe right now. Banks are failing and being nationalized.
I talked to a lot of younger Europeans, in their mid-20's, and I heard a common theme which was "I didn't notice anything until just a few weeks ago and now its looking bad..."
The very last European I talked to was somebody who was on her way to America for a month to find a job in her field of expertise. I think she was just out of university and is the most ambitious and determined person I've met in a long time. She knows the economy is screwed but she's going after her dream anyway. You have to respect a person with that kind of enthusiasm. I hope she conquers the world.
She was the exception to my experience... what I was hearing overall is that a lot of the terrible economic and social conditions we've been experiencing in America are just getting started in many parts of Europe and people are beginning to grow fearful.
One difference I noticed was that in Europe, or at least in the Netherlands, people tend to mind their own business unless you feel like revealing something personal and open it up for discussion. In America people are always in other people's business all the time and the gossip is 24/7 and that's why we have all the call-in radio and TV shows, reality shows, advice shows, tabloid shows, network news shows for every political view, etc. I'm convinced America is the gossip-mill capital of the world.
Some of these things like sub-prime, no-doc lending, and foreclosures are not as openly discussed and revealed in Europe nearly to the degree as in America, but the cracks are starting to show and the problems are coming to the surface.
The point is, the economic situation in Europe is looking as bearish as we've been saying and I don't see a turnaround before it gets worse. As I told my friends in Europe, I'm certain the EMU (European Monetary Union) is about to get bigger in the near future. I think in 2009 the Eurozone will take on a new shape and will certainly add a new level of complexity trading the EUR/USD.
On a personal note, I had the most gracious hosts you could ask for, everything was taken care of for me and the whole trip went better than I could have imagined. The hotel accommodations were fantastic and I think those that made it left with some additional profit in their account and a stronger understanding of how to trade these markets for consistent profit.
Bear market rally due in March:
During the month of February the Dow lost a respectable 1,000+ points. The S&P 500 is putting in its worst performance since 1937. The S&P 500 is now down 47% year-over-year. Even Warren Buffet is keeping pace with the S&P's monumental losses. In his annual letter he reported Berkshire being down 44% year-over-year. And in terms of earnings, Buffet's Berkshire Hathaway took a 2008 earnings loss of 96%.
This is purely my opinion -- but I see these markets are perfectly set-up to make a sharp and vicious snap back up. If I'm wrong and we have another massive sell-off all month long, so be it, I'm just an intraday trader. But I would not be short of Wall St. right now if I were trading equities.
It's my opinion that the Dow, S&P 500, and S&P 500 futures have either overshot the downside or are nearing the overshoot point; the exhaustion point. As a Forex trader, the last thing I want to be is caught short on the EUR/USD or EUR/JPY when Wall St. decides enough is enough and we have a violent 320-point bear market rally on the Dow. I believe that moment is now due and could come when least expected.
I believe any solid bear market rally will also overshoot to the upside and once it becomes exhausted we'll see a renewed round of selling on Wall St. These markets are anything but near a bottom and we've not seen an end to the panic and fear in the global financial markets but a relief rally is imminent. Think "short squeeze".
EUR/USD:
With it being the first week of the new month we have a full economic calendar like always... it doesn't help we also have to contend with a federal budget proposal that would make Chairman Mao smile, a banking system on the brink of nationalization, and rising geo-political tensions in places like the not-real and man-made country known as Afghanistan and on the Gaza Strip.
Here are the key events for the EUR/USD that I'll be focused on:
Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4
Rhetoric out of the EU's summit
Bernanke's testimony
Trichet's speech on Tuesday
ECB's rate decision and Trichet press conference
NFP
Unemployment rate
Surprise news affecting the global financial markets
The rest of the stuff is just noise in my opinion and those are the issues I'm most concerned with this week.
ECB--
My forecast calls for the ECB to cut rates 50bps on Thursday. I can make a much better argument for Trichet being forced to cut rates by at least 50bps on Thursday even if it's against his will. The ECB has no choice but to act more aggressively and show global market participants they are willing to take measures like the Fed and Treasury.
Of course monetary policy won't solve the issues but the ECB needs to play the part and stop spoiling the party. Trichet will see GDP numbers that are comparatively as bad as what Bernanke sees in the US. It's all coming and the faster Trichet accepts reality the faster we can get on with things. Expect another freak show in Frankfurt on Thursday.
USD Index--
In my opinion it's make or break time for the USD Index. There's solid resistance at 88.50 on the upside and solid support at 86.50 on the downside but this range is coming due for a break and I believe we'll see a break sooner rather than later. It could be a break a trader wouldn't want to get caught on the wrong side of.
I'm not making any predictions but if I had to guess, I'd say the USD is due for a season of weakness overall. All we need to do is look at any number of Fed and Treasury data to know those two banks are using monetary policy to rapidly accelerate the depreciation of the US dollar.
When I look at the Fed and Treasury's monetary policy and read between the lines, I see Bernanke and Geithner using monetary policy to prevent deflation and speed up the process of re-inflating the economy. There's a hole at the top of the bubble and the Fed was trying to force air back into the bubble from the bottom which doesn't work. Now, with all of the new monetary programs the Fed and Treasury are re-inflating the bubble through the top and the bottom, hoping this somehow forces the bubble to inflate again.
Wall St. needs inflation to go up again. The USD Index needs to stop moving up and start moving down in order for Wall St. to stop moving down and start moving up. It cannot work any other way. Wall St. cannot gain if the dollar keeps gaining, it's a clear correlation under current market conditions and only works one way.
When the global markets decided they've had enough of the USD and risk aversion is set aside, the USD Index should break the support at the 86.50 level while at the same time equity indexes like the Dow and S&P 500 should be breaking through resistance. The scenario would also include Treasuries turning increasingly bearish, crude gaining, and gold possibly continuing to fall.
So, as I see these markets begin to align, I see the potential for the USD Index to be exhausted or close to being exhausted if it can't break through the 88.50 level. When it can't go up, there's only one other place it will go...
Treasuries--
The benchmark 10-year yield has continued to quickly gain support well above the 3.00% level even in the midst of Wall St.'s massive sell-off last week. Is this a good sign or a bad sign? Both. It's a bad sign for the US government that nobody wants to buy their debt but it's a good sign for equities because maybe some of those money-flows that were bound for Treasuries may end up coming to equities should a sustainable rally begin.
I'm bearish on Treasuries. The 10-year's bullish run to the 2.00% level failed miserably several times and the Treasury is printing money so fast and creating so much debt out of thin air so rapidly it's hard to imagine Treasuries somehow turning bullish all of the sudden. Sell it all.
I want to see Treasuries get sold-off so viciously it makes Geithner crack. People like Geithner are the ones responsible for this mess and it's time for these markets to turn the tables on them. Maybe only in a perfect would that ever happen. Get the Xanax ready for Geithner if China decides to use Treasuries as leverage when their economy takes some hits...
Even if the Fed keeps rates at 0.00%, the market will move rates up for them via Treasuries, thank you very much.
Trading--
The market's not opened yet at the time of this post but I'm expecting chaotic and illogical trading conditions overall. There's just a whole bunch of crap going on and it's making people crazy. Humans control markets and when the humans are crazy the markets are crazy.
As bearish as I am on the euro and the Eurozone economy I can't be any less bearish on the dollar and US economy. The trillions being added to the national deficit is enough to send the US dollar to its death.
The Obama administration wants to spend trillions to socialize the US health care system in the midst of the worst global financial crisis that is already costing several trillion to keep solvent. That makes about as much sense as the trillions spent on the war in Iraq... for what? Bush had his trillion-dollar+ war and now Obama has his own trillion-dollar+ war... same difference in my eyes.
Neither matter is the government's issue. Those two planes that flew into the Twin Towers I think was strictly business between Osama Bin Laden and the Bush family. Connecting the dots between Bin Laden, daddy Bush and his son aren't very hard to do. Most Americans don't have health care, so be it, that's life. Obama see's votes in socialized health care just like Bush saw votes in creating fear and enemy to rally patriotism.
I'm sure Obama and Democratic lobbyists are well connected to the health care industry and there are dozens of backroom deals ready to go down when health care becomes socialized. Politics are such a joke and I think a person has to be insane to pursue power through political office.
As far as trading goes, it's a very difficult time with all of these critical economic and geo-political events weighing on the markets. My trading plan is to use lower-risk entries and be happy taking small profit when the market shows sign of either upside or downside exhaustion. I don't want to get caught shorting the bottom or long at the top, so I'll stick to that plan for now. Very simple.
Smart risk and money management will be essential this week especially the next 72-hours as certain market participants will be positioning themselves for the new month, the end of Q1 soon, the ECB, NFP, you name it... the money-flows in and out of the markets this week should make for some times of strong volatility.
Until the EUR/USD can sustain a downside break of the 1.2500 level, I'm not going to get too excited about any euro downside moves. My trade plan at least at the start of the week calls for buying the euro on the dips. If the markets turn to selling the JPY and the USD Index heads towards a support level break, the EUR/USD would benefit nicely from that type of move.
This is already a mini novel, so I'll close things out here. Do not overleverage and if you don't like the trading conditions, don't trade. Keep it as simple as possible this week, stay flexible and expect more chaos.
Greetings from Oosterbeek... well, we certainly had an interesting start to the week so far. All markets experienced sharp price swings almost as soon as Asia came into the game last night and right through the close of NY. This is why I laugh on days like today when I see the euro run up towards the 1.3000 level. First thing this morning I said I don't care about this euro run, we should see 1.2700 by 1700 EST today. We hit 1.2700 by 1500 EST with even more downside potential on the horizon.
Did we see anything new today? Not really these moves are now commonplace and really have no rhyme or reason but for want of liquidity and levelheaded thinking. For me the best thing about today was not what the market did but what I've been discovering while I'm here in Europe.
Of course I'm here to see friends and traders but I needed to travel here for myself. I needed to see it all for myself, I needed to see if my views and opinions on conditions in the European banking system actually matched reality. I had to see with my own eyes and hear with my own ears what the real economic viability of the EMU is in the midst of the global financial turmoil. I think the EMU is about to get bigger... I don't have time right now to get into the particulars but I'm feeling extremely comfortable with my overall bearish views on the Eurozone and the EUR/USD. As one trader put it best, "the party in Europe is just about to begin". That's really all I needed to hear.
When I get back to America I want to write a post on how this trip to Europe is shaping my views and outlook for the overall state of the markets in the next month and beyond. I will say this, I believe the Forex market, equities, commodities, and bonds are due for a new season; a new turn or direction. I don't mean in terms of trend direction per say but I feel like things are coming that will change the face of the markets as we've known them since October of last year to moment we're in right now. Things are not right.
Wall St.
What happened to Wall St. on Monday? Well Asia had a few ideas that the S&P 500 futures should go up along with Dow futures and all anti-risk correlated markets like the euro, crude, etc. London and NY had different ideas and it was mostly strong money-flows out of the S&P 500, equities couldn't catch a bid followed by heavy selling and then the S&P 500 futures breaking down again in the 780s, falling 40+ points by the close of NY -- it's those types of moves, fueled purely by panic and fear, that cause the sharp price swings which lead to an almost instantaneous bearish JPY turn into a very bullish JPY along with gold, the dollar, Treasuries, and the USD Index.
The USD Index said "no thank you" to the 86.50 level and made nice gains which only helped push the euro lower against the dollar. The stoploss triggering is also part of the equation of course. For those that sent in a few emails today asking why the markets did what they did, that's my opinion.
EUR/USD:
As I'm writing this part of today's update it's 10-minutes until 1700 EST when we rollover into Asia and now we will wait to see what Tokyo has in mind this evening... a continuation of today's moves made during London and NY? It's possible, don't forget it was the Asian markets who continued Friday's intense upside moves in the EUR/USD, GBP/USD, USD/CHF, JPY crosses and all the others. All traders should beware of stop hunting and stoploss triggering in the markets between 1700 EST and 2000 EST this evening.
Fundamentally we have a number of key events on the calendar for Tuesday. Starting in Europe we'll get French (non) Consumer Spending, German IFO, and Industrial New Orders along with a few other pieces of data that will be crappy. If the more important euro data like German IFO and Industrial New Orders prints stronger to the upside and the JPY happens to be weak at the same time it's possible to see the euro gain on this news. Worse than expected data may be seen out of Europe between 0245 EST and 0900 EST on Tuesday morning...
For the US market we have Consumer Confidence as the key data. There is no consumer, there will be no confidence, end of story. The biggest event of the day is Bernanke's testimony before the Senate Banking Committee in DC. Bernanke will give a report on one of my favorite things... Fed monetary policy. I'm expecting another circus side show act in Washington tomorrow when Republicans get a chance to hammer Bernanke. What can Bernanke say tomorrow that will give the markets any confidence or direction for the future?
Wall St. will likely open with the same level of panic and fear they closed with on Monday. The Dow and S&P 500 were brutalized right into the close. But with Bernanke we need to be listening for any rhetoric, double-speak, slip of the tongue, or odd body language to signal how the market may trade the USD. His report is on monetary policy and as I see it, the Fed's past and current monetary policy has sealed the long-term fate of the USD -- it should be valued on par with Zimbabwe.
We are not in any logical trading or economic conditions so we'll see all of these worthless, over-valued currencies continue to slaughter each other as they all respectively battle it out for last place in the race to the bottom of the pits of hell. No central banker on earth wants a strong currency or can have long-term survivability with an uptrending currency in light of the global economic turmoil.
Neither Bernanke or Trichet can afford a strong currency right now... these guys don't really need buying power, they need some type of debt savior. Anyway, as far as trading and the euro is concerned, my plan is simple -- I'm shorting the EUR/USD and EUR/JPY on the rises unless the markets show me otherwise. I've picked a side, I'll fight with the bears for now and play the downside corrections.
These are the times when strict risk and money management is imperative for all traders. Be aware of what time it is in NY before you take a trade, have a gameplan in case the market moves against your position, and be ready to take a loss and be patient until the market shows you to take the next trade. I expect more of the same on Tuesday.
This will be one of the last updates for the week. I'm getting ready for my trip to Europe and won't have much time for the markets until Sunday. Thursday was wild. Starting in early London and through the mid NY session we saw bear market rallies for the EUR/USD, EUR/JPY, GBP/JPY, crude, S&P 500 futures... everything was bouncing and recovering nicely but Wall St. did not have a bear market rally.
In my opinion that's where everything went wrong... as I said about a dozen times the past 24-hours, these markets were due to bounce and rally, they all did except for the Dow and S&P 500 when Wall St. opened. I think this stopped all markets dead in their tracks and then the process of giving back their gains.
Spot crude went mental... it started the day around $34, surged to $38, dropped back to $34, surged back up to almost $40 and is now ranging around the $39 level. Gold sold-off as risk aversion was set aside in the Forex, commodities, and Treasuries markets on Thursday. The equities futures markets took on risk, driving the S&P 500 futures to the 796 level before falling below 780 in late NY trading.
The EUR/USD recovered about 230-points off its lows but failed fast above the 1.2750 level. In fact the high Thursday was right on the 1.2760 key level where it sold-off and fell 100+ points. Obviously 1.2760 is important to the market and is being protected by the bears for now. Global currency panic:
Even with Wall St. failing again to the downside the JPY remains weak and unable to catch a solid bid. I'm no expert on the yen or the Japanese economy but this could be a sign market participants are finally understanding how abysmal the Japanese economy looks in light of a global recession. If safe-haven money-flows were going into the yen like they do the dollar, at some point people will have to wake up and realize the JPY is just as worthless as the USD will end up being.
I'm not an alarmist but as conditions continue to deteriorate in the global markets, I'm concerned about panic setting in the currency market and a situation unfold where market participants pile into the dollar and slaughter everything else. It would be like the ultimate battle of worsts and pure chaos. This type of situation could play out if the Dow and S&P 500 start making extreme lows or we have a major geo-political event or somebody's sovereign debt is downgraded/defaulted... somebody like Japan, an Eastern European country, the UK, the US, take your pick...
Wall St. is set-up to take another leg down if support fails to hold and the bears take the Dow and S&P 500 to places not seen in a number of years. What cannot be predicted is how our market will repsond and specifically what the EUR/USD will do. That being said, the logical move would be more strengthening of the USD and gold.
Wall St.:
As I write this there are 13-minutes to go before Wall St. closes and the Dow is well below it's November 20th closing low of 7,552. The bears that trade on techs could easily use that factor as another reason to sell, likewise it could be a place ot take profit on shorts, which would cause equities to bounce -- that's exactly the type of risks that will be in the markets on Friday... trader beware.
Tomorrow we should expect sharp price swings and times of strong volatility as global market participants square up their books, take profit, take losses, add new positions, etc. The moves made on Wall St. tomorrow will largely affect moves seen in currencies.
EUR/USD:
I think the trading conditions will most likely be a mess during London and NY on Friday. There is a ton of Eurozone manufacturing and production data which is not expected to print strong. Trichet speaks as London rolls in and there's no telling what Trichet will say tomorrow. He could reference the upcoming rate decision or he could say nothing at all.
There's no EUR/USD bias for Friday, it purely be a traders market in my opinion. At 0830 we get CPI and Core CPI and I expect both to print positive to the upside just like PPI did. If we get a strong CPI print it's possible that might be enough to slow down Wall St's slide and give them something to cheer about.
Everybody on earth is talking about Rick Santelli's revolutionary rhetoric in the bond pits this morning. It's on Youtube and CNBC's website site, I watched it and it's good stuff, check it out.
That's all for now. I may have one or two more updates if market conditions warrant.
I'm looking forward to the day we don't unveil a new government bail out, spending program, or piece of legislation, but saving the homeowner is the government's flavor of the week and on Wednesday Obama gave the markets his plan to save 9-million foreclosures at a cost of $75 billion plus another $200 billion of "just in case" money for Fannie and Freddie.
Wall St. didn't like the plan too much. The Dow managed to close just three points above last November 20th's closing low but it spent a good portion of the day moving towards the intraday low of 7,449 and within striking distance of 5-year lows. The S&P 500 closed in the red while the futures were hammered most of the trade day. Crude stalled out and gold surged with the help of more panic money.
Mortgage nationalization:
It's estimated at least 28% of all mortgage holders in the US own a home worth less than what they owe. The upside-down crowd is the group of homeowners Obama is targeting. Under the Obama foreclosure plan the banks are offered special incentives to cut the mortgage payments to a level that is no higher than 31% of the homeowner's income. In non smoke-and-mirrors terms, this is called government price fixing.
There's other convoluted aspects to this plan that won't work but this part is the most troubling. How can the government put a value on a home that's in foreclosure when home prices still have to fall at least another 5%? Many homes in foreclosure have been sitting vacant for months, infested with rats and mold, and the banks are supposed to trust the government to fix the price on that home and negotiate a reduction in principle and interest? This sounds like insanity thinking to me.
It shouldn't be any surprise financial stocks fell after Obama released his plan. This is a terrible deal for banks and only really good for homeowners with mortgages held by one of the GSE's. Fannie and Freddie have zero risk here, folks who used their homes like ATM machines will catch a break, and in the end the markets get screwed because this is a form of nationalization I believe will begin catching on like a virus in other sovereign nations.
Bear market rally due:
If Obama, Bernanke, and Geithner will shut up for a few days I would expect to see another bear market rally on Wall St. in the near future. I believe the idiots in DC and people like that Japanese finance minister who was drunk out of his mind at the G7 are the ones causing most of the fear and panic in the global markets.
When the politicians and central bankers go back to doing what they do best like chasing interns and lobbyists, maybe Wall St. will finally calm down and some of the beaten down equities will squeeze the shorts and go back on one of those 350-point bear market rallies we used to see a few months ago.
I think a bear market rally is due on Wall St. and should this occur the EUR/USD, EUR/JPY, crude, and S&P 500 futures would benefit while the USD, JPY, USD Index, and Treasuries would fall. Unless we have mega moves in S&P 500 and Dow futures overnight, those markets should open Thursday back near key support levels.
Obviously if support is tested and continues to hold there's only one other way Wall St. can go. If you're not familiar with bear market rallies, they can be extremely volatile with sharp price swings, extended moves and heavy stoploss triggering. It's not something you want to be on the wrong side of even though they often come back.
Thursday or Friday would be a great time for the bulls to short squeeze the bears. Reason being, the bears have been short and in command of the markets for the past 72-hours. At some point the shorts will want to start covering their positions before the end of the week. That's a perfect opportunity for the bulls to throw liquidity into the market to catch the upside volatility created by short-covering.
So as more shorts cover this would cause the markets to continue to bid up, then stops start getting triggered and as those positions are liquidated it causes further bids to hit the markets meanwhile the bulls are pouring liquidity into the markets and buying into the rises... it can go on for several hours or several days. Eventually the markets overshoot to the upside, run out of momentum, then begin to retrace their gains.
That's the essence of a bear market rally, I think Wall St. is due to see one and this means I adjust my trade plan and risk plan for the rest of the trade week. If it doesn't happen I don't care, I'll keep shorting the euro rises, but I'm ready for it.
Bernanke and FOMC:
Bernanke did a great job talking from both sides of his mouth today -- his message to those who fear a return of inflation: "With global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time".
His message to those who don't fear inflation: "At some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate, unwind some of its credit-easing programs and allow its balance sheet to shrink".
When Bernanke's dovish and hawkish at the exact same time it doesn't help the markets make sense of anything. In an effort to be more "transparent" the FOMC updated their economic forecasts and the Fed is now predicting the economy will contract between 1.3% and 0.5% this year and grow 2.5% to 3.3% in 2010.
The Fed also said the unemployment rate would likely rise to 8.5% to 8.8% in 2009 before gradually declining over the next two years; consumer prices would likely rise 0.3% to 1% this year; and the economic outlook is considerably worse than in October when the FOMC thought the economy would grow by 1.1% in 2009. Wrong.
EUR/USD:
My overall view on the euro remains bearish but it's certainly due for a bounce back up after failing to break my 1.2507 key level during the NY session. As the price action in the EUR/USD and all correlated markets continues to evolve the rest of this week my trade plan will allow euro longs when conditions show a higher probability of this being the proper trade. No trader wants to be caught short below 1.2550 should the bear market rally take shape and these beaten down markets go on a run.
Fundamentally we have PPI, Core PPI, Initial Claims, Philly Fed Index, and Crude Inventories. I'm not expecting a negative print on PPI and I think Initial Claims will print lower than last week. Atlanta Fed Lockhart speaks about economic conditions on Thursday at 1315 EST.
At this point Asia is just getting into the game and Tokyo's yet to make its presence felt so I will have more EUR/USD and overall market commentary as conditions warrant. I don't expect too much volatility until after London opens. It could be more on the quietside until NY even.
The S&P 500 futures are trying to recover right now and gold continues to climb back towards resistance levels. Keep your eye on these two during Tokyo if you are trading. There will be euro stops set above the 1.2624 level so it's possible we see the euro move up there to knock out those stops sometime in the next 12-hours.
The Forex market and all markets for that matter took an interesting turn at the start of the week. It was also a historic day as the US taxpayer became officially burdened with the biggest debt-funded spending plan in American history.
Just before signing the spending bill, Obama remarked, "This is the beginning of the end..." Of course he was referring to his stimulus plan and how it was going to fix Wall St. and Main St. but I have a feeling his words will be prophetic for other reasons. It may take ten or more years to all play out but I fear adding several trillion dollars of debt in this kind of way and under these types of conditions will come back to haunt us in the end.
Equities test lows:
As we suspected would be the case this week, the Dow tested it's November 20th closing low of 7,552 and closed exactly on that level. On November 21st the Dow made an intraday low of 7,449 and this level now comes into view over the next 72-hours.
The S&P 500 isn't quite near it's November lows but quickly approaching those levels. The S&P 500 futures have been weak since last Friday and fell all the way into the 780's before recovering late Tuesday. As you know I've been bearish on equities but now I'll look for the bulls to make some sort of stand against the Dow and S&P 500 breaking to new intraday or closing lows.
There is genuine panic on Wall St. and even more so on the European bourses. European equities were hammered on Tuesday as more concern is raised about the health of Europe's banking system. I'm finally starting to feel justified for my negative views on Europe's banking and financial system. It's been at least six months in the making but the negative sentiment on Euro banks is picking up steam and will serve to keep continued downside pressure on Euro stocks and European currencies.
Wall St. will be tested again tomorrow as Obama unveils a new spending package for homeowners in addition to key economic data for housing, production, inflation, growth, the FOMC meeting minutes, and then a speech by Bernanke.
Commodity price action reveals fear in markets:
Gold has gone mental the past 48-hours as market participants gripped by fear and anxiety pile into the commodity. Gold hit 7-month highs and is positioned to continue its extended move towards the $1,000 level. For gold I will be watching two levels: $1,000 and $1,035. Should the market take spot gold above that $1,035 level it could easily soar to places not seen in a number of years.
On Tuesday we had a repeat of the USD/Gold anomaly -- both the dollar and spot gold made simultaneous gains. This is such a rarity and such an impossible correlation it can only signal participants have little faith in seeing normally functioning markets in the near-future. The surge in gold, USD, and the USD Index indicates market participants are concerned about more than the economy and equities.
There is real fear of currency collapses in weaker markets and this too is driving gold prices. Moody's is ready to drop the hatchet on Eastern European banks and this would have a terribly negative affect on bigger players in Germany, Sweden, and France who will suffer losses from ratings and debt downgrades made by the likes of Moody's.
Crude's price action is more inline with the normal USD/Crude correlation and I remain nothing but bearish on crude in the near-term. Fundamentally and economically there's nothing to push crude past $50 any time soon in my opinion. Crude will surge up again one day but we're not ready for that yet. Crude's continued downside weakness will weigh on the S&P 500 futures which will weigh on the EUR/USD. Spot crude led the S&P 500 futures lower, it pushed them below the 800 level and was extremely helpful as a trade indicator on Tuesday.
More bailouts coming:
If you believe the passage of Obama's $1 trillion spending package was the last of the taxpayer funded government bailouts, think again...
Chrysler said it needs another $5 billion in taxpayer funds to keep going. Chrysler's already borrowed $4 billion. Chrysler was insolvent when it borrowed the first $4 billion and it will be insolvent after it borrows the next $5 billion. Either Chrysler or the government needs to stop the company from keeping its employees on an emotional roller coaster... take it to the field, shoot it and lets move on.
GM is in as big a mess as Chrysler and should be merged with Ford to form one automaker where each company keeps its profitable product lines and works towards producing better products that people will actually buy. GM's asking for another $17 billion in taxpayer money to keep the lights on... what a mess... more job cuts will be forthcoming from all three automakers.
And what about the commercial real estate market? We hear very little about this real estate sector but troubles here should begin to emerge sooner rather than later in my view. The post office will probably need a bailout, the states of California and Kansas will need more bailouts, home builders, steel producers, and the service and hospitality industries will all likely need bailouts.
These are the types of reasons why equities can't gain any upside traction and why risk aversion money-flows should continue pushing gold higher and crude lower in the near-term.
EUR/USD:
Overall I maintain the same bearish view on the euro. As we said, should a sustained break of the 1.2692 level occurr the euro would drop another 100-points from there and we've seen this already play out on Tuesday. Traders who are attempting to buy the euro are making their lives much harder than they need to be. I've had quite a few emails this week already and all I can say is, if you've been adding new positions in the 1.2800's and 1.2700's you're peeing in the wind. I don't see the need for traders to have the stress of euro longs in 300-points of DD under these chaotic conditions.
My trading bias remains to short the euro on the rises. To make it simple, here's why:
Gold: EUR-
Crude: EUR-
EUR/USD price action: EUR-
USD Index: EUR-
S&P 500: EUR-
Dow: EUR-
EUR/USD fundamentals: EUR-
S&P 500 futures: EUR-
European banking and sovereign debt: EUR-
"Gurus" saying to buy the euro: EUR-
Those are just ten fast reasons I can think of to keep me shorting the euro rises. Obviously it can move back to the 1.2850 level and higher should equities recover but risk is clearly on the euro at this stage and I see no point to fight against the trend, the price action, and the market sentiment. My 1.2692 level is key for any potential euro upside recovery. In my view as long as we stay below that level the doors to the 1.2480 level remain open.
Fundamentals--
On Wednesday the market has to contend with: Housing Starts, Building Permits, Industrial Production, Import Price Index, the FOMC meeting minutes and a speech by Bernanke. Obama will speak tomorrow and unveil his homeowner rescue plan. Overall the data should have limited market interference and I would suspect market participants stay focused on their fears and what's happening with the government, Fed, and market correlated variables.
The 10-year yield has moved back down and is headed for a return to the sub 2.50% level should current conditions persist in the short-term. As far as Wall St. is concerned, I really cannot predict how they will react tomorrow.
The Frankfurt and London sessions will be critical for the EUR/USD as we see how those markets react to more bad news out of the Eurozone and more fears about Euro bank downgrades. As far as trading goes, my bias and plan is clear and I'm sticking with it until the market shows me otherwise.
I expect the price action in all markets to remain choppy with times of sharp price swings when the liquidity picks up during London and NY. These are not "buy-and-hold" conditions by any stretch of the imagination, that is a losing strategy in this game right now and I do not recommend traders hold euro longs above the 1.2760 level into heavy DD, this makes no sense when longs can be taken 200-points lower right now.
The EUR/USD, crude, and the S&P 500 futures are due for a bit of a bounce and upside retracement but I'll use a euro rise to short it again mostly on a scalp and intraday basis. It can go back up as high as it wants to, when it's exhausted and overextended, I'll short it down again.
More updates will be posted later as market conditions warrant.
With about 2-hours to go before Wall St. opens we can see all markets under a considerable amount of pressure early this morning. After the break of the 1.2700 level we've seen the euro drop 100-points and is now moving back towards a test of the 1.2600 level as I write this commentary.
My overall view remains bearish on the euro and my price levels remain the same -- as long as wemaintain a sustained break below the 1.2692 level I see more downside and I'm expecting a sustained downside break of 1.2600 and we should see points lower.
German and Eurozone ZEW printed much better than expected but this is mostly due to speculation Trichet will cut rates by 50bps in a few weeks. The euro gained back zero ground on the back of strong ZEW because what we're seeing right now has zero to do with those numbers, there is panic in these markets today.
The S&P 500 futures are at low levels I've never seen before. They've made a few runs at breaking 800, failing each time but the momentum to go lower is certainly there. Should spot crude decide to take another run at the $32 level or lower we could see some slaughter with the S&P 500 futures. Both of these EUR/USD market correlated variables keep downside pressure on the euro.
Spot gold has gone mental so far today trading at the $963 level. I saw gold blow through resistance at $950 and $955 and yet again we see clear evidence of how panicked and freaked the global financial markets are. Market particpants have little faith in the future right now because in reality conditions continue to deteriorate, this cannot be denied by any.
Trading risk will be extremely high today because it's very likely Wall St. will open with the Dow and S&P trading near dangerous downside levels. Should those November 2008 lows break down and support gives way on the Dow and S&P 500 there's really no predicting what could happen. I imagine we'd see some kind of freefall situation while stops are knocked out and a stoploss run of apocalyptic proportion unfolds in Forex, equities, and commodities. The futures market will go nuts if Wall St. breaks solid support.
Last week I said my gut feeling tells me those November lows will be tested and today could be the day. If not today, in the short-term I believe.
Trade smart today. If your risk appetite is low, sit on the sidelines and pick up the crumbs later on this evening.
