Saturday, August 13, 2011

Summary of this week in the stock market and where we go from here. (UPDATE)

At the end of this very volatile week in the stock market, with days up and down in a 500 points range, many are wondering whether they should sell or buy stocks. This is compounded by the facts that we are in an indecisive period right now and therefore predicting market direction is even more difficult in the short term. I have said I believe we are headed lower in the next 6-12 months, but I can't tell you when we drop further from here. We had closed below the 11,000 level this week on Monday and Wednesday, but on Thursday and Friday we closed above, closing at 11,269. I had said in my previous posts there was going to be a fight at the 11,000 level once we had broken below the 11,500 level. So, in fact, we did and, this testing of 11,000 level, may not be complete.

In the below chart, of the Dow over a 5 year period, I have added some red arrows to signify many of the significant drops in the Dow value followed by flat indecision periods, identified with blue flat lines. The purpose was to show that there is a period of time after a drop where the direction is uncertain. We are now in that period. As you can see below, it can last for about a month or so. Other factors are at play.

The news will dictate in which direction we go, and I think one could build a very strong case that markets will go down further. For example, this most recent major drop was precipitated by 2 events. The first was the concern over Italy and its debt problems and whether they were going to default, because they are such a large economy, they can't really be bailed out unless the EU started printing money like our Fed did. The second concern was from the Debt Ceiling deadline and the politics involved in almost defaulting here. This precipitated the S&P to downgrade the US from AAA to AA+ rating. Then the market tanked.

We are now in the stage where we have the Congress appointing a special committee to work out details to come to an agreement on where further cuts are going to come from. They must do this by Nov. 23rd. If they can agree on a package, there is no guarantee it will be approved by both Houses of Congress, because there will be no Amendments aloud. It will face an up or down vote.

Also, we have the 2012 Budget which must be approved by Congress by Oct. 1st. All this with the 2012 Presidential election in the background. The chances of having bipartisanship is nearly zero. That is why I see the market going down a lot more from here. As the expression goes, it is all baked in the cake. Wish it weren't so, but it is the stark reality we face. And the Fed has signaled they aren't going to do much more given the economy looks so weak. They said they will keep existing rates through until 2013, which is an unprecedented move on their part.

It took us 2 1/2 years to climb out from the low of 6,500 on the Dow. I believe it will only take a year to go down and retest that low, given the state of politics and the weakness in the Global economy, with many debt laden countries. This will also produce social unrest at levels we have not seen in my lifetime. We are starting to see the early stages of this now.

UPDATE: Monday 5:35am PST.

The Empire Manufacturing Index data was released at 5:30am this morning. The reading came in at -7.70 for August compared to an expectation of 0.0 and the previous dat of -3.76 for July. This month's data is going in the wrong direction for recovery and for a healthier stock market. The reading this morning is not having a negative effect on the Futures market and from all I can see the market will start up this morning.

At 7:00am PST the NAHB Housing data will be released for August. Expectations are for a reading of 15, which would be the same as it was for July.

Tuesday's release of July's Housing starts and Building Permits will be interesting to see. Also tomorrow's data will include Import and Export prices as well as Industrial Production for July and Capacity Utilization for July. These are all lagging indicators. The most important of these are Housing Starts, Building permits and Industrial Production.

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