Equity markets fell again yesterday as the US Budget impasse continues. The Dow and S&P 500 both fell 1.1% and 1.2% respectively whilst European stocks averaged an 0.8% decline. Senate Democrats are reportedly planning a test vote for the end of the week that would raise the debt ceiling by around $1 trillion without including any of the spending cuts sought by Republicans. This vote would then have to pass the Republican controlled House. Meanwhile President Obama warned that the US risks a very deep recession if Congress does not raise the debt ceiling and told John Boehner that he is willing to negotiate on topics such as Healthcare but only after the Government is reopened and the debt ceiling raised.
With markets pricing in an increased chance of a US Government default the VIX Risk Aversion Index pushed up another couple of points to 20.1% now well above mid September’s low of 12.3%. There have also been sharp gains in short term US interest rates with one month Treasury Bills rising 15 basis points to 0.3%.
The IMF revised down its global growth forecasts for 2013 and 2014 by 0.3% and 0.2% respectively to 2.9% and 3.9% and warned that a US default would seriously damage the global economy but it’s forecasts do not assume such a possibility.
This morning on the economic front we have UK and German Industrial Production. Late this afternoon the Fed releases its Minutes from the September 17/18 FOMC Meeting. These are the Minutes at which the Fed failed to deliver the anticipated start to QE tapering. Although now superseded by the US Fiscal woes, the Minutes will be crucial to see just how close the Fed came to start tapering.
December S&P 500
The S&P, having opened brightly, ended the day with a nasty sell off into the close before mounting a small rally overnight on the hopes that the Budget impasse will end by the weekend. The S&P closed below its 200 Day Moving Average at 1662 and if we do not regain this level by Friday it could lead to a more protracted sell off. The market tried a couple of times shortly after the New York open to rally but could not breach 1672.
I covered my long 1665 position from yesterday morning at 1670. The market then got hit hard into the close and the S&P traded down to my 1649 buy level with a 1646.25 low and after a small rally overnight I have covered my position this morning at 1655 and I am now flat. The S&P is now very oversold on both a Daily and Weekly basis and is still trading at the bottom of its Bollinger Band and Williams Index. The McClellan Oscillator closed with a reading at -200 yesterday. I would prefer to see this indicator with a -250/-300 before being really confident of a meaningful rally taking place. Today I will be a small seller on any rally to 1663/1668 with a 1672 stop which is just above yesterday afternoons high. I will also be a strong buyer on any dip to 1642/1646 with a 1638 stop.
Euro/USD
The Euro worked well yesterday as the market traded up to my 1.3600 sell level. The Euro at these levels will not help the periphery countries in the Euro-Zone and for this reason I have covered half my position at 1.3550 and I will leave a breakeven stop on the other half at 1.3600. This is the first time this year that I have left a short Euro position run as I look for the Euro to start putting in a top in the market. If I am stopped out of my short position I will be a more aggressive seller from 1.3630/1.3650 with a 1.3670 stop.
December DAX
The Dax still continues to outperform the other major stock markets but the question is how long can this market hold up when the other indices are falling hard. Just before the close last night the Dax traded down to my 8560 buy level and after a nice rally this morning I have covered this position at 8560 and I am now flat. I do not like the fact that the Dax managed to close below the important 8570/8600 support zone and today I will be a small seller in this region with a 8620 stop which is just above yesterday morning’s high.
December FTSE
The FTSE traded down to my 6355 buy level before stopping me of this position at 6325 and I am now flat The FTSE is very oversold and at the bottom of the Bollinger Band and Williams Index. The 6300/6325 is crucial for the market as a break and close below 6290 will be very bearish. Today I will be a small buyer from 6280/6295 with a tight 6270 stop as I look for this support zone to hold.
Dow Rolling Contract
The Dow got slammed yesterday with the market down nearly 1000 points since the last FOMC Meeting on September 18. The market quickly traded down to my 14895 buy level before stopping me out of this position at 14825 and I am now flat. The Dow is oversold on both a Daily and Weekly basis and today I will be a small buyer on any dip to 10720/10750 with a 10695 stop. Given how oversold the market is I do not want to be short at this time.
December BUND
The Bund just missed my 139.85 buy level yesterday before trading higher. I really like the Bund as it is a good hedge against any up coming Euro-Zone crisis and is trading very bullishly at the moment. Today I will raise my buy level to 140.10/140.35 with a 139.85 stop which is just below yesterdays low.
Gold Rolling Contract
Gold worked well yesterday as shortly after I posted the market traded down to my 1318 buy level with a 1316 low before having a nice rally and I was able to cover this position at 1328 and I am now flat. Today I will be a small buyer on any dip to 1305/1312 with a 1299 stop.
Silver Rolling Contract
Silver also worked well yesterday as the market traded down to my 22.20 buy level before having a small rally and I was able to cover my position at 22.45 and I am now flat. Today I will be a small buyer on any dip to 21.70/22.00 with a 21.45 stop.
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