Market Observations: 31 October 2011

An important week for the validity of the month long rebound

General Conditions

  • The reaction to the European Debt saga ‘resolution’ was overwhelmingly positive. Equity markets around the world surged on Thursday, with the American indexes up 3% and European and Asian markets up even more. In my view these moves have been continuations of the up move that had been in place for the majority of the month. In my view this ‘risk on’ month is a corrective month, but this week will be very decisive in my opinion. Technically and fundamentally we seem to be at a crucial point in the markets. I feel as though we are looking for a top at this stage, and the rumblings on financial media seem to confirm that. Everyone is parroting the statistic about the stock market having its best month since 1974, and you can’t help but take the opposite side to that sort of thing and start to look for selling points. That is what I’ll be looking at this week.
  • Since I last wrote, US GDP, Personal Spending and Income figures were all released. The GDP figure came in at 2.5%, which was better than estimates of 2.4%. My take on this is simple, the fact that GDP has gone up is more to do with inflation than anything else; the GDP figure measures the monetary transactions in the economy and to the extent it has risen is to do with the fact people are paying more for things than they were before. According to Catherine Rampell at Economix the economy is finally back at the size it was in 2007, before the Financial Crisis began. To believe that would be to ignore the fact that our debt is larger than it was back then, for starters.
  • The Personal Spending and Income figures are discouraging in my view, given that American households saw their incomes rise by 0.1%, yet increased spending by 0.6%, suggesting that a depletion of savings allowed them to do so. Which is what has happened, as the savings rate dropped to 3.6% from 4.1%. It was this dynamic that boosted the GDP figures, and therefore does not portend well for future GDP growth, as the spending/income trend we have seen is not sustainable.
  • Looking forward, we have a massive week ahead of us, with Canadian GDP, Manufacturing PMI from China, US, and the UK, Rate decisions from Australia, the Fed, EU, and US Employment, just to name a few data points to keep an eye on.

The Technicals

SPX

Weekly chart. As I postulated last time, the European debt deal seems to have given the impetus to carry equities past the 1257-1260 area and to a higher level. I suggested a rather wide range of 1275-1315 to watch for a reversal, which coincides with the 78.6% retracement of the move from the years highs to the 1074 low early this month. At the moment my eyes are peeled for a reversal candle on the lower time frames.


 EUR/USD

Weekly View. Similar to the SPX, I suggested to watch for a reversal in the 1.40-1.42 area. The weekly did not close above the 1.42 mark, despite breaking above it to 1.425. As I write, prior to the London open, we are trading below 1.40. I am looking for one last push towards the highs of last week to find an ideal place to get short. Notice that this whole move up since the lows of 1.3140 is a test of the spring/summer cluster that was broken out of in early August.

Trading Levels to Watch: 1.40-1.42 above; 1.3820, 1.3655 below


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