S&P 500 hangs in the balance

Overnight the tone of futures markets has been pretty negative, pushing the major indexes to levels that could retest the trend line support at open if we stay this low.  The S&P has been flirting with 820, a very key level that if significantly violated to the downside, 813 and 800 remain as important support levels.  After 800, we have a vacuum that could reach the November lows.  Of course a violation of 820 on the downside will be seen as a breakdown of the modest uptrend and that could catalyse a wave of selling.

SPY

One discouraging sign is since the small rally in early January, every time the S&P 500 has bumped the 50 day moving average we’ve seen a wave of selling.   Market participants are not commiting to long term positions, but range / trend trading short term and this action is increasing volatility.

The Treasury plan’s lack of detail disappoints

The US market had its worst day in 2009 on account of the Treasury’s lack of direction and specifics in their plan to assist ailing financial institutions.  The Dow shrugged off 8000 and the S&P lost the key area of 850.  The only encouraging signs are some end of day short covering in to the oversold condition that was created and that the S&P 500 is still hugging its uptrend line from the Nov ’08 lows.  Other than that the picture looks quite bad.   Geithner had been expected to reveal details and even figures, but instead the market received more rhetoric and promises.

Gold to $1000?

The action in precious metals lately has been impressive.  Silver and gold caught a bid amidst the chaos in currency markets and bank balance sheets.  The nervousness has created an atmosphere of fleeing away from equity in to safer havens.  With gold seemingly gaining steam to make another move to the upside, is $1000 within sight?

Looking ahead

Markets tend to discount the here and now and focus on the future.  Has gold already priced in potential inflation or is that a variable being gauged on a daily basis?  Options traders in GLD would suggest that $95 to $100 (or around 950-1000/oz) are reasonable price targets given their usually large call positions.

Charting the course

Right now $1000 is resistance long term, without some extraordinary volatility to the upside.  Below is a three year, weekly chart of GLD.  The bollinger bands are a great indication of potential support and resistance in price moves.  We’re using a longer term chart to get a very broad view of GLD’s price action over the last 150 weeks.

GLD ETF

Past performance

While past performance is no indication of future gains, GLD has outperformed the SPY (S&P 500) consistently for quite some time.  Gold has always provided a safe haven for value.  For thousands of years, gold has had the same purchasing power.

It is wise for investors with long term objectives to have some precious metals exposure in any portfolio as a hedge against inflation, which is expected to increase significantly in time.  Traders may want to be more aggressive playing the rally depending on your strategy.

Canadian dollar may rally

With the US poised to announce multiple government endorsed packages  to stimulate the economy and assist banks, it is likely that a dramatic weakening of the US dollar will occur.  The Canadian dollar seems especially well positioned to rally, perhaps even back to par with the US dollar.

Canadian dollar (FXC)

We can see in the above chart a bottoming process in the Canadian dollar beginning to take shape. Now that oil is also potentially bottoming and some commodities are finding strength, the trend serves the commodity-driven Canadian dollar well.  Watch the USDCAD pair and the FXC Canadian dollar ETF.

Bad bank scrapped

According to CNBC,  “The Obama administration’s wide-ranging plan to stabilize the financial system no longer includes creating a “bad bank” but will still contain measures to encourage private firms to buy up toxic assets from financial institutions, according to a source familiar with the plan.

In addition, funding for the bank-rescue plan is unlikely to exceed the $350 billion currently available under the TARP, this source said.”

Long term outlook for 2009

Just when a collective sigh of relief was breathed about 2008 ending and a fresh year beginning, 2009 was ushered in by the worst ever index performance in the S&P 500 and Dow Jones 30 for a January.  This was certainly not encouraging for those that believe in the adage, “So goes January, so goes the year”.

Outlook not so good

2009 promises investors and traders one thing.  Uncertainty.  While the market has declined nearly 50% peak to trough, the deleveraging process has not been completed.  Banks still have far too much common stock equity vs. assets on book.   Usually recoveries in any stock market are led by financials, so this turn around prospect seems bleak until the equity to assets ratio improves.

Inflation prospects seem to be rearing their ugly head again, as precious metals are catching a strong bid.  Oil seems to have bottomed.  Gas prices are on the rise again for consumers.  Treasury bonds are selling off.  The baltic dryships index has been recovering based on Asian demand for raw materials.  Certainly ZIRP (zero interest rate policy) has created the possibility of a new carry trade.

Recovery, what recovery?

Most predict that the US markets will tread through a slow, “L-shaped” recovery because of the serious damage to credit and stock markets, and most importantly, confidence.  Nearly $9 trillion is sitting on the sidelines in virtually zero yield short term treasuries and money markets.  That cash has yet to be deployed, and was originally retracted from equities, because of a flight to safety from confidence being lost.

The smart money is watching China and Taiwan, as the markets there have enjoyed a significant recovery from their lows and forming a bottoming pattern.  With the US dollar nearly free to borrow for currency traders, the possibility of the dollar becoming a carry trade currency is quite real.  Long term prospects for the dollar are weak so traders would not feel as though their principle loan is going to increase from dollar strength.

History in the making or repeating itself?

The possibility is striking because when Japan suffered a similar crisis in the early 90s, their currency suffered this very fate.  The carry trade in Japan caused most financial institutions to move money outside of Japan rather than invest in the country and assist its recovery.  Infact, Japanese equity markets have never recovered and still thrash around making significant lower highs and lower lows in recent months.

In my opinion, this is indicative of a significant risk to recovery in the US markets.  Already gold is more valuable per ounce than the S&P index.  Other stock markets are outperforming the US market on their recoveries.  Will the trend continue?