Right now the SP 500 is selling off hard to 1126 down 40 points on the day in response to Fed’s remarks yesterday. While they see the weakness in our economy and the growing risks in Europe they’re willing to do little at this point. I must admit to feeling much better hanging on to our SDS hedges and not getting sucked into the rally last week, as this is a moment I’ve anticipated.
The SP500 is near the bottom of its trading range of 1100 to 1230 and this morning I’ve sold our SDS hedge for $25.41.
While the economy is weak the consensus opinion is that the US is already in recession, but this may not be the case: The Conference Boards leading economic index (LEI) rose .3% for the fourth straight month, expectations were for a .1% gain. The Conference Board put the chances of a recession at less than 50% but also suggested risks were rising.
The Ned Davis Economic Timing index has dropped but still remains at a level consistent with modest economic growth.
In addition, the FHFA purchase only housing price index rose .8% in July and while it remains 3.3% below its reading of a year ago it could be showing early signs of stabilization since this is the highest reading of 2011.
Investor sentiment is dismal, no doubt there but one must keep an objective eye on the data. While many consider the Fed’s lack of action as a negative, in my opinion the ball is really in the court of our political leaders. Fiscal policies are likely to have a greater impact on our economy than monetary policy. Monetary policy in balance sheet deleveraging economies is essentially pushing on a string since there is little loan demand. Individuals and corporations are saving capital rather than spending, hence you could drive rates down to 1% across the board and still see little ripple effect.
Lastly, from a technical viewpoint the early August low saw over 1200 stocks on the NYSE make new annual lows. At present the number is 735 which is a positive divergence and an early sign that selling could be exhausting itself.
While this smells acts and trades like a Bear Market, the news is not completely awful, just partially disgusting. Hence, based on my short term trading models we’re at a short term extreme and a bounce should be expected. Till proven otherwise we remain in a 1230 to 1100 trading range.
Brad
No positions