What a week. The China/Asia slowdown worries came full force onto the radar screen with the collapse of copper and the Hang Seng. We put more stock in these real time indicators than the official data coming out of officialdom. Now the market must contend with three macro bears: 1) how much and how Asia slows; 2) the Eurozone debt crisis; and 3) the slowing U.S. economy and employment/political problem.
Can equities hold up? We don’t know for certain but do think the danger is on the long side. These three issues are going to take time to resolve with resolution of the latter two constrained by severe institutional and political pressure.
The equity markets have a few positive factors working for them: 1) a lot of bad news is priced; 2) earnings have thus far held up and will have to confirm the negative macro for stocks to break hard and stay down; 3) commodity prices are falling back to earth, which is a positive real income shock for consumers and energy importers; 4) fast money is bearish and most likely net short; 5) interest rates are approaching zero in almost all maturities and impatient money will have to be put to work somewhere; 6) the global volatility will end or accelerate the end of the tightening cycle in emerging markets; and 7) we are pretty beared up, which is usually an indicator markets are ready to move higher.
Add it all up? Continued volatility and 1101, 1101, 1101 on the S&P500!
Finally, we warned last week gold could take a big swan dive and $1,700 was where the “river meets the waterfall.” The chart below shows the yellow metal hasn’t been below its 200-day moving average in more than 2 1/2 years. The power of the rally has been stunning. We now think gold is set to test its 200-day moving average at $1,527, which is the level we will take a shot at getting long again.
Good luck this week!
(click here if charts are not observable)