art 2 : Coming Week Market Movers & How To Profit
The following is a weekly strategy guide for traders and investors, covering coming week’s market movers and trade ramifications for traders of all major asset classes via both traditional instruments and binary options. Perfect for those seeking a summary look at likely coming week market movers
The past week’s continued rally was mostly on rising hopes for progress on the EU crisis. No one believes the big ultimate solution is coming soon. That would require two huge commitments we don’t think the EU is ready to do:
- Place national budgets under centralized EU control in order to avoid a repeat crisis. That means ceding a huge chunk of national sovereignty. How much control does a nation have if foreigners can determine its budget?
- More bailouts from funding nations, probably more austerity or asset sales from debtor nations.
The current rally is based on a belief that the EU may defer the day of reckoning again, long enough to get a meaningful, tradable rally. We should find out if this rally has legs this week, and if it has a chance to progress substantially higher, conceivably back near highs not seen since mid 2008 (though we doubt that much progress is likely). Here are the11 reasons why this week could open the door for another 100 point or more move.
A. Technical Picture: Bullish Double Bottom Awaits Confirmation
The first reason is that technically, risk assets are at crossroads.
If there’s no breakthrough news justifying higher markets, technical resistance could be enough to spark profit taking and prevent further rallies in risk assets.
We refer to the S&P 500 as our barometer for risk assets in general.
As the chart below shows, we may be completing a bullish double bottom pattern that suggests the end of the down move that began in late July (A). For confirmation we’d need a sustained break above the 1120-60 zone, which includes:
- The neckline around1220
- The 100 day EMA also ~ 1120 (not shown)
- The 200 day EMA around 1230
- The 61.8% Fibonacci retracement of the July downtrend (A).
- Some room for the usual random market noise and false breaks higher
A move above ~1160 would open the way for a move higher equal to the distance from the bottoms to the neck line, about 120 points from the neck line to ~1340. Beyond the usual minor resistance from round number price levels (1280, 1290, 1300, etc) we see no significant resistance areas containing multiple points of resistance like we see in the 1120-60 zone
As always, take these patterns as a useful guide, not inviolate truths. Because so many traders pay attention to these patterns, they create a degree of self-fulfilling prophecy which you shouldn’t ignore.
S&P 500 DAILY CHART 20 JULY – 14 OCT COURTESY ANYOPTION.COM 2011
07 OCT 15 2331
That’s the very simple technical picture facing us at the start of the week. Now let’s look at the likely key fundamental drivers for next week’s markets.
B. Fundamental Picture: 10 Things To Watch
The EU crisis remains the biggest market driver, so events affecting sentiment about it are the most significant market drivers.
REASONS 1-8: EU CRISIS RELATED EVENTS
1. Market Reaction To Last Week’s G-20 Meeting
The Saturday meeting was to lay the foundations for the summits on October 23 and in November 3rd in Cannes. The short version is that there are no solid details, yet over the past 2 weeks markets have given EU leaders the benefit of the doubt that they’ll conjure up a plan to both delay a Greek default and to restore lost confidence in the EU banking system and creditworthiness of Spain, Italy, France, and their banks.
While details have yet to be worked out, the latest crisis plan contains 3 elements:
A. New Bailout For Greece: Greece remains the central problem, and needs another bailout in addition to the €110 billion ($152 billion) program granted in May 2010. France and Germany still don’t agree on the details. While risks of further haircuts for Greek bondholder have receded, they aren’t gone, as there are German officials who still want them.
B. Supporting The Banks Affected By Greek Bond Losses: Per a wsj.com, report, one official said the countries were nearing an accord on requiring a 9% level of so-called Tier 1 capital.
C. An Enlarged Bailout Fund To Reassure Markets: Euro-zone nations are trying to boost their €440 billion ($606 billion) bailout fund, the European Financial Stability Facility (EFSF), possibly via an insurance program to guarantee investors some protection against losses in European debt. Expanding the effective lending power of the EFSF is arguably the key to restoring enough confidence to halt the contagion hitting bonds of Spain and Italy. The difficulty in achieving the recent relatively modest EFSF expansion suggests the EU is not ready to commit to the €2 trillion believed needed to restore confidence, bring down GIIPS bond yields, and restore confidence (and thus interbank lending) in EU banks.
This past week markets were optimistic, leaving potential for disappointment, made all the more possible by the fact that risk assets are hitting near term technical resistance. If the past is any guide, we expect more disappointment before any final agreement.
October 23rd is the next date that might provide some clarity on the above issues.
2. Bigger Haircuts For GIIPs Bond Holders? Dangerous, Self Defeating
No, bank bailouts don’t seem very fair. However even Jimmy Carter, with his love of seemingly moral but really bone-headed policies, recognised that “laaf is vera unfaya.”
There are conflicting reports about whether there will be additional haircuts for private sector bondholders (mostly the EU banks). The last time haircuts were imposed on bondholders (the July 21 Greek rescue package) the result was a worsening of the crisis. The new risks imposed on Greek bond holders drove away buyers of European sovereign and bank bonds that carried any hint of exposure to the GIIPS, including those of Italy and France, which until then had not been touched by the spreading contagion. EU banks, suddenly facing new unknown losses, now looked riskier, and so were cut off from their normal long term borrowing sources. They saw their shares and bond prices plunge, and got hit with a wave of downgrades with more threatened, most recently by Fitch this past week.
Per a Reuters report out this past Wednesday, EU officials are now admitting to haircuts as high as 50%. Many believe the ultimate losses on Greek and other GIIPS bonds will be even higher, some believe much higher. If in fact Saturday’s G20 meeting took further haircuts off the table, as noted in Part 1, that should be a step in the right direction, as noted in Part 1. However it’s unclear whether officials from Germany and other funding nations (beyond France, which opposes further haircuts given the damage they’d do to French banks) are ready to accept this policy.
OTHER EU CRISIS EVENTS
Here’s a calendar of EU debt crisis related events for the coming week.
3. Thursday, October 20
The European Central Bank’s Governing Council will meet in Brussels. While they’re not likely to see any decisions, we could hear rumours about a rate cut in November or even further measures to stabilise the troubled currency area.
Friday, October 21: €2 billion in Greek Treasury bills mature. We’ll probably know by then whether the EFSF has been ratified, and how long the country can hold out.
4. Sunday October 23 Summit
The EU Council (Heads of State) meeting in Brussels on 23 October may include discussion of a roadmap towards fiscal and political integration. Headlines are likely to be positive, as this is chance to drum up more positive PR. However investors should consider that there are considerable obstacles to overcome that might require more time than markets are willing to grant before some new fear catalyst sparks another EU crisis- driven -selloff. These include:
- Germany and other nations may need a public vote in order to relinquish additional sovereign rights to Europe.
- Fiscal integration will be time-consuming
- Financial resources provided by the EFSF are likely to be inadequate to keep peripheral bond markets supported.
- Bringing the European stabilisation Mechanism (ESM) forward and giving it a bank licence suggests an indirect monetization of debt. That would weaken the EUR and thus also raise yields on EUR denominated debt.
Anticipation Regarding Key EU Events In The Weeks Ahead
5. Monday October 24
The EC/ECB/IMF (aka: The Troika) may issue a final report on Greece. Last Tuesday inspectors “rubber stamped” approval of the next $11 billion in aid for Greece even though Greece failed to meet goals required to get the cash. Still, the alternative was imminent Greek default and, once again, risk of a “Lehman” moment type market crisis. This report is the Troika’s last chance to block the funds. Unless there’s a plan to support banks threatened with default as their Greek and other GIIPS bonds become nearly worthless, we expect Greece will get the money regardless of what the report says.
6. Tuesday November 1
Mario Draghi replaces Jean Claude Trichet as ECB President. He might use the occasion to announce new steps to combat the EU crisis.
7 and 8: Thursday November 3
A big day that includes:
- ECB policy meeting, the first under Draghi, markets expect a rate cut. Expect the EUR to struggle in the days prior to this meeting if these expectations hold, as markets price in a lower rate and less attractive EUR.
- G-20 Leaders Meet In Cannes: If a detailed rescue plan hasn’t been announced already, this is the expected occasion for it. Given their past proclivities for too little too late (unless they can show they got the IMF to pony up too), they may well disappoint expectations. Will markets have patience left for a further wait? That likely depends on whether the G-20 is successful in at least deferring the day of reckoning long enough for a tradable rally yet again.
ANOTHER WAVE OF BANK CREDIT RATING DOWNGRADES?
Last Thursday Fitch warned of coming bank downgrades for some of the world’s largest banks, including:
–Barclays Bank plc
–Credit Suisse AG
–Deutsche Bank AG
–The Goldman Sachs Group, Inc.
If somehow the EU is quiet, earnings and the economic calendar may shift focus onto the US. Earnings are the big event this week. This will be the second week of US earnings, and typically these have the most market influence within the first 2-3 weeks. After that, the tone is usually already set and the influence of earnings announcements fades.
These were not market moving in the past week. Markets rose with sentiment on the EU even as earnings disappointed. Google’s good results may have helped the market Friday, but again we believe that was a secondary factor after EU optimism. Bellwether names include:
Monday Oct 17
SCHW, C, DAL, HAL, SWK, UAL, WFC
Tuesday Oct 18
AAPL, BAC, KO, CSX, EMC, GS, HOG, INTC, JNJ, YHOO
Wednesday Oct 19
AXP, BK, EBAY, FCX, MS
Thursday Oct 20
Friday Oct 21
HON, GE, MCD, VZ
Consult any good earnings calendar for details.
10. TOP ECONOMIC CALENDAR EVENTS
Consult any good economic calendar for details.
Monday Oct 17
Tuesday Oct 18
AUD: monetary policy minutes
CNY: assorted data which together provide latest look at China: GDP, fixed asset investment, industrial production, NBS press conference
EUR: German ZEW survey
USD: PPI, TIC Long term purchases, Fed Chairman Bernanke speaks
Wednesday Oct 19
GBP: MPC Meeting Minutes
USD: Building permits, CPI, Beige book, housing starts
Thursday Oct 20
GBP: Retail sales
USD: existing home sales, Philly Fed Mfg index
Friday Oct 21
EUR: Trichet speaks, German Ifo business climate
So what do you do? We wait to see if after all this, the S&P 500 and other risk assets make a decisive break through that signals more progress is likely, as discussed above. Until then we stand aside.
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN’T BE TELLING YOU FOR FREE, NOW WOULD WE?
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