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Equities: More Downside To Come?
Submitted by Nic Lenoir
We started the year saying that without a catalyst equities would trade between 1014 and 1236 for the S&P future, knowing that we think there are a number of risks that could lead to much more aggressive downside scenarios. Our outlook has not changed. And we still feel that China is one of those catalysts that could create serious problems in the market.
While the recent sell-off and risk aversion has been triggered by Obama's remarks on banking regulation, we think in the end whatever proposal he may come up with will be watered down to nothing. Every government over the past 30 years has been populist, especially in response to adverse equity market price action, so we think in the end politicians will scare themselves into doing nothing. Maybe this is the first time this principle will not be respected in 30 years, but we don't think so. Then there was obviously Paul Volcker standing in the background. He is the worst nightmare of all those who have been riding the whole of liquidity provided by governments around the world. However, as much animosity there might be between Congress and the Fed as they fight to decide who gets the stick to police around, it will be a hard task to debunk Mr. Bernanke out of his role as chairman. And no congressman really wishes he had not done what he did as in the end they have the most to lose if the established order was to be destroyed. If anything there is a greater chance Mr. Geithner's head rolls I would argue.
Meanwhile far away from this domestic political drama, China is taking steps to take liquidity. That is a development that could have far greater consequences. Indeed China's CPI is more sensitive to commodity prices as the US's (especially since we have been convinced to forget about food and gasoline) and 2009's rally in commodities means inflation numbers in China are likely to come in strong. The PBoC has no political capital when it comes to letting CPI getting far out of its target band. Congratulations to those who had called for early tightening in H1 2010. The fact is that China may start exporting its inflation through currency appreciation or yuan based inflation, and will hike rates as Chinese real estate is in the very late stage of a massive bubble. Surely that can't be good. If Asia and China is the motor of the rebound, then surely asset prices can't welcome a hiking cycle on the back of a real estate bubble and an unprecedented lending spree. How much is China willing to commit sepuku is anyone's guess but consequences could seriously threaten our fragile economic equilibrium.
Looking at price action, the Shanghai composite index has closed below the highs of September which invalidates a bullish impulse scenario. The 200 dma provides temporary support but we think further downside is likely.
We contended at the start of the year that no matter what happened medium-term US equities had to correct before anything else could happen even in a bullish scenario. The 1075/1065 support zone for the S&P future is not so far away. What will necessarily capture the eyes of the bears is that on a log scale we failed on the 61.8% retracement line at the highs (see weekly chart), so a very bearish argument can be made that we are entering the next huge sell-off from a technical standpoint. This is all the more interesting that the Dax shows the same feature in terms of retracement, and we also have a perfect a-b-c structure since the lows of March 2009 with c = a, so market symmetry definitely reinforces the bearish case. Note also on the daily chart for the Dax that the medium term supporting 100-dma has been violated on this last sell-off. On the hourly we feel that the S&P future may have completed a wave 3 of lower order, but bullish divergence is relatively mild, and so the rebound could well top around 1,105/1,108 before another drop to 1,065 to complete this initial sequence.
We will further update as the short-term price action develop but technically we have some strong arguments for a bearish case of greater order building up.
Good luck trading,
Nic
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What a joke this market is. The only bullish case I can make is that most US money managers are idiots.
Couldn't have said it better myself.
ERR, I nominate you for comment of the week. ++
"The only bullish case I can make is that most US money managers are idiots."
+10
LOL. I read 10 pages a day from economists attempting to convey that same message. your 15 words are what they all mean and wish they could say as succinctly. brilliant.
This is so f'n funny... they're bitching out Bob Pretcher on CNBC even though the downturn started 30 minutes before he got on.
Be careful though, 3 month and 6 month bills are selling off slightly and while the 5 year is catching a bid with the auction tomorrow, 10 & 30 yr bonds are flat (6 month got up to 0.14% from the 0.11% it was at a few days ago), so while I'm looking for the bounce around where Lenoir is stating, something is telling me it might not be so easy.
lol.... how funny.
I was just telling my associate the same thing. I was laughing right when Sue and whatever the other d-bag's name is started placing the blame on Bob, when actually during the 5-min Bob was on and left the market actually flattened off and ticked up a bit. But yes, I agree pretty laughable CNBC is. I'm just waiting for Bob Pisani to come on and say how the increase in volume is bullish.
lol, Pisani is funny, but I gotta say he's been honest about how this volume is actually a bad sign over the past 2 days. Still a douche tho.
Oh, please, the number of people trading off of Prechter's call is minuscule and it's probably almost all retail traders. Prechter could run down Wall Street naked screaming "The End is Near!" and he couldn't move the market. The charts clearly showed weakness of the afternoon high right away and when the bulls could have made their stand, they didn't, which then opened the gates to the downside.
If the word plummet = downside.............
That's funny.
Nic,
Why do you think the recent selloff has been triggered by Obama's bank proposal and not what is going on in China.
Have you been listening to too much mainstream media or do you think everyone is dumb?
China is a convenient scapegoat for the mainstream
media.
Seppuku is more a Japanese thing, than a Chinese one.
Yeah, whatever you say..............
Where is Robo and some chic pics?
When the proctologists are done with Timmy G. he'll gun the futures again with your money and yell "WHEEEEEEEEEEEEE!"
What? You guys started believing in a free market? Again...................
If you looked at all the economic facts around the globe the DOW should be about 5,000 but the Ministry of Propaganda and the brown shirts are keeping it unreal....suure nuff.
I like Nic but, I don't agree with people that use the word "populist". Recent sell-off began with AA earnings, not "has been triggered by Obama's remarks on banking regulation"
Nic Lenoir -- Oct 2nd, SPX at 1024: "we will be moving lower"
Nic Lenois -- Nov 6th, SPX at 1070: "we have a clean a-b-c, with c=a...focus on the downside... to break 1026... and test 943"
Good luck with that ZH traders. How long does Nic get to keep losing everyone money? That's 2 calls... #1, Down 5% in 1month. Number 2, Down 7% in 2 months.
He zigs again, do you zag? Or will the blind squirrel find a nut?
absolutely !
I would add the short Nikkei to that
This post is bs. Do you trade? I thank the lord for people like you, cuz you pay my bills.
My most reliable and sophisticated indicator "the locker room attendant," double topped last week. For those of you unfamiliar, it is a nationwide survey of the frequency of stock tips given by locker room attendants pickled with the occasional hair stylist to keep it unskewed for gender. Thousand handle is first target, trail to 920.