Bear Flag: Will Stock Markets Panic?

The Federal Reserve appears to be out of bullets, technical indicators look ominous, economic reports are dismal and September is historically the worst month of the year for major stock indexes.  Will markets panic?
On My Wall Street Radar:

SPX

On a technical basis we still remain in a wide trading range that will need to be resolved in one direction or other:

The current pattern is known as a “bear flag” which is formed after a steep, high volume plunge that is followed by sideways to higher price action on declining volume that is followed by a second plunge to new lows.  The downside target of the second move down is found by subtracting the length of the pole from the breakout point.

The Economic View from 35,000 Feet:

Big news last week was the Federal Reserve meeting at Jackson Hole in which Dr. Bernanke announced basically nothing except that he has “the tools” to deal with today’s problems and that the Fed would deliberate those tools in detail at what will now be an extended two day meeting in September.

What those tools might be is anybody’s guess and the question must be if he has some great tools left in his kit why hasn’t he already used them since we’re now almost four years into this financial crisis?

The economic news continued to be mostly glum with new home sales declining, the Richmond Fed Manufacturing Index declining to -10 from a previously reported -1, weekly jobless claims rising to 417,000 from 412,000 and 2nd Quarter GDP revised downward to 1% from 1.3%.  The only bright spot in the gloom was Durable Goods which rose.

More and more analysts are downgrading their estimates for economic growth a growing chance of a double dip recession with several major reports already indicating economic contraction.  However, Dr. Bernanke still believes that we’ll continue a “moderate recovery” and  ETF giant iShares make a strong argument that a double dip might not be in the cards.

On a calendar basis, September is the worst month for stocks as reported by my friend, Jeffrey Hirsch from Stock Traders Almanac.

What It All Means for Stock Market and ETF Investors:

What it all means is pretty simple; more volatility, more danger and more opportunity for those who can be on the right side of these dynamic markets.

The big question is what the Fed can or cannot do and what affect this action will or will not have.

Furthermore, we have a raft of major economic news coming this week as we head into the labour Day weekend.

If the news is bad, the stock markets may, indeed, decide that it is time to panic:

At Wall Street Sector Selector, we remain defensive and expect the current downtrend to continue over the intermediate term.

The Business and Financial News Week Ahead:

This is a huge week of economic news that will likely generate major moves as we wrap up August and head into the seasonally weak month of September.

Significant Upcoming Economic Reports and Activity:

Monday: July Personal Incomes, July Consumer Spending, June Pending Home Sales

Tuesday: June Case/Shiller Housing Index, August Consumer Confidence, FOMC Meeting Minutes

Wednesday: August ADP Employment, August Chicago PMI, July Factory Orders

Thursday: Initial Unemployment Claims, Continuing Claims, August ISM Report, July Construction Spending, August Motor Vehicle Sales

Friday: August Non Farm Payrolls, August Employment

ETF Spotlight:

Leaders: (ITB) Home Construction (IYF) Financials

Laggards: (SLV) Silver (EWM) Malaysia

This week we’re taking a vacation at Diamond Lake, Oregon, which is our favourite Oregon blue ribbon trout fishing lake.  I’m writing this from the lobby of the rustic Diamond Lake Lodge, built in the 1920s, and it’s a beautiful August morning.  This afternoon we’re going to drive down the fabled Rogue River to Ashland for dinner at a great French restaurant and then watch Julius Caesar get murdered at the Ashland Shakespeare Festival.

Blue ribbon trout, French cuisine and Shakespeare in the closing days of summer; it doesn’t get much better than this.  I’m recharging today and look forward to continuing our work together through the challenging days ahead.

Wishing you a great weekend wherever you may be,

John

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Disclaimer:  Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.

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