Providing Stock Market Analysis and Economic Commentary without the Hype
Following in the footsteps of the recent series of bad economic data, the monthly employment situation report issued on Friday morning did not deviate from the recent ‘bad’ news concerning the economy.
The employment situation data caused a ‘stop in your tracks‘ and sell reaction in the major indices at the market open. The S&P 500 never reached my target price for entering a short position and I was not about to short the hole as we traders refer to the action that occurred on Friday morning. Remember it always comes down to achieving the best entry, chasing a position (long or short) is dangerous to your capital.
The S&P 500 (SPX cash index) sold down and reached the lower wedge line I discussed many times over the past week. This lower wedge line provided a text book market bounce that created a flood of short covering, sending prices higher in a nearly panic buying frenzy into the close.
What also fueled the afternoon recovery was a report circulating from Goldman Sachs that they lowered their full year GDP outlook for the United States. So if Goldman Sachs, and others, are lowering their outlook for the economy then why did the market rally? For this answer we only need to look at Ben Bernanke and his merry men at the FOMC. The market believes that the recent series of poor economic data and forecasts will put new pressure on the Fed to initiate another round of monetary easing.
This “easing” could be in the form of the Fed buying additional assets, a new round of stimulus spending, or any number of other “prop up the economy with toothpick” scenarios that failed to work in the first round. Organic growth continues to be missing, and without that any measures to prop up the economy will be once again simply be a temporary fix to what is a systemic cancer of debt spreading throughout the economy.
The FOMC will be meeting tomorrow and will announce their latest rate decision along with policy statement on Tuesday at 2:15pm (US ET). One investment firm is already out saying that the FOMC will have to respond to the deteriorating economic conditions right away and announce new measures as early as this week. Ben Bernanke and his printing press happy cohorts are in a bind. In his FOMC statement this Tuesday he can’t turn a blind eye to the recent economic news which has been worse than expected. But what more can he do without further endangering the sovereign rating of the United States?
Ben Bernanke needs to fully acknowledge in his statement that economic conditions have deteriorated, no playing with words anymore. He must convince the markets he knows things are not improving. And he has to be tough and not announce additional easing measures which has up to now failed to work and has only pushed the nation further into debt. The market would probably not like that, but reality sucks.
Back to the S&P 500 chart. I am still planning on initiating short positions if the top wedge area is reached. I will have more on the market action and especially the S&P 500 chart activity in the market video which will be posted later this evening.
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