Sunday, September 27, 2009

Bloody Battle

So what about this upcoming week? It will be a very very important week. Bears have not taken complete control but they are close. This week has the potential to be bloody on both sides.

I am speaking only in probabilities and the way this plays out is fairly bifurcated. If I was writing a bearish script, Wednesday and Thursday will be the make or break day. It is the end of the quarter and the beginning of the quarter, some interesting economic data coming out, and a report on the financial health of the European banking system.

That does not mean Monday and Tuesday are not important and the market may just give up the ghost early in the week but the likelihood (especially Monday) is sideways to up action moving with the trendline I talked about last week (to correct a mistake I made last week, that trendline is from the move up in July, not March). In my mind the important number is still 1060. The bears needs to hold this. There is no economic news at all on Monday and the German elections will be wrapped up (Merkel has won reelection). Who knows but this should be slightly bullish all things equal especially with the sell off last week (also bearish for the dollar). Tuesday is the Case Schiller House Price Index and Consumer Confidence. Once again this would tend to be bullish if I had to guess. The Case Schiller will be positive, the only question is if the market has priced in to much and if the markets sees ahead that prices will start dropping again. It would be easy for the bears if the markets dropped Monday or Tuesday. It is just rarely that easy. That trendline is important and usually the market doesn't give up that easily on a trendline. It will trace it for a day or two bouncing above and below before it realizes it lost and you have a big down move. What can't happen for the bears is for it get stuffed back up into that trendline.

Than comes what I think are the important days in the week. Wednesday and Thursday. Chicago PMI comes out on Wednesday and the ISM index comes out on Thursday. Chicago PMI is expected to jump from 50 to 52 and the ISM Index is supposed to jump from 52.9 to 54. I have read differing reports that these numbers could surprise to the downside. (I have also read suprise to the upside) If the downside were to happen, that would be confirmation of Friday's durable goods numbers that the "recovery" is weaker than expected. Than on Thursday, auto sales come out. This will be an ugly ugly number. It may have the affect of shocking the market to the realization that any recovery we have had is made up of smoke and mirrors. A disappointment in the ISM numbers and the auto sales will be very ugly for the markets. There is one more thing going on Wednesday and Thursday that isn't getting much press but has the potential to be very very big (at least in my opinion). According to CNBC a stress test that is being conducted by European regulators will be discussed on Thursday and Friday and the IMF is releasing a study on Wednesday. According to the article:

Twenty-two large banks in Europe may have accumulated credit losses of close to €400 billion for this year and next, according to officials who have seen a draft of conclusions of “stress tests” conducted by European regulators.

At a meeting next Thursday and Friday in Sweden, European Union finance ministers are planning to publish at least one headline figure on banking health based on the results of the tests, the officials, who were not authorized to speak publicly, said Friday.


The International Monetary Fund will publish its own forecast of bank health Wednesday as part of its Financial Stability Review.

Now if you remember, the "stress test" sparked a huge rally in American banks. Don't expect the same thing to happen in Europe. For one, there has been a huge rally leading into the stress test and secondly European banks have been much slower to address the problems because the accounting rules historically has hidden the problems much better. More than anything I think this could be a currency event which transforms itself into a stock market event. The U.S. government has already spent tons of money filling holes in the banks, Europe hasn't. If Europe is forced to start spending tons of government cash that would be very bullish for the dollar. I still think Europe is where the next epicenter of the crises will be.

The timing of the importance of this report may not be this week. I don't know but I think over the next few months it could become very important. It is something to be aware of though for the end of the week especially if currencies start moving.

The thing I have not talked about this week is employment numbers. The ADP report comes out on Wednesday, jobless claims on Thursday, and the Nonfarm payrolls on Friday. These numbers will be interpreted anyway the market wants to interpret them. In general my guess is they will be slightly better than forecasted but the market may once again be expecting more than forecast (nonfarm payrolls expected at 225k loss while whisper numbers are around 180k).

Taking a step back looking at the bigger picture, even the bears are scared right now seeing what is developing. Last week was what a top looks like. Everything looked right. Because the bears have just been beaten to a pulp the last six months there are very few who have much confidence that this could be a top. Of course the irony is that is exactly what you need. The media likewise is being very passive. Any previous 2 to 4% pullback it was hand wringing and articles warning about a big correction. Not currently.

One of the main things going for the bears is big institutional selling into the end of the quarter. The market finished on its lows Thursday and Friday selling into the close. I believe (and know in some cases) that big institutions are selling after this monstrous rally has caused there equity holdings as a percentage of their investment portfolio to become to big. This could cause the market to roll over on Monday or Tuesday but at the very least should keep the market from getting jammed back into the trendline in a major way.

Like I said, this week is very bifurcated. It does not matter how the market trades as long as 1060 is held on any test and bears take over at some point this week on a big move down. I do the market gives up the ghost this week and I have laid out one possibility as to how.

No comments: