By Nic Lenoir Of ICAP
In case politicians don't understand what's at stake, the market kindly gave them a little reminder with a nasty close for equities today. In the early morning it seemed people were quite willing to ignore GS's misfortunes in its dealings with the ever more schizophrenic government. Washington simply cannot understand why it can't destroy speculation and leverage yet keep the equity market up, as it is the only economic driver in the US since easy credit is no longer available. Tough indeed: since nothing or close to nothing is manufactured in the US we need our upper class's investments to skyrocket so it is inclined to spend thereby providing service jobs. US politicians have a lot of work on their plate with the financial reform. Any measures too drastic in terms of balance sheet reduction will be tough on financial assets and curb lending, and any measures to curb speculation on commodities will hit this asset class hard and the commodity stocks along with them (miners are amongst leaders in US equities). European politicians have one fine mess to sort as well and money markets are pricing in higher Libor and funding difficulties ahead already. Without expanding too much on the subject, there is no one I would like less to depend on to make the right decisions.
While stocks were within reach of new highs to start the day in the US, it seems market participants felt like taking risk off before the brainiacs try to figure out what it is exactly they want to do, and by the same token give them a reminder as to the consequences of any stupid decision. S&P is pretty close to posting a H&S on the tops (though the neckline is slightly downward sloping which is not ideal) and the support zone is 1,175/1,180. Watch out below. Similar observation on the Nasdaq future with a neckline support at 1,990. The Nikkei joins in the H&S galore, and the Dax which seems to have been more resolutely bearish (understandable given that the epicenter of the main crapshow the market is focusing on is Europe). After a 61.8% or close retracement of the initial sell-off, if the Dax goes to make new lows next week the markets should in theory accelerate to the downside. For good measure, the French index (CAC) is sitting on a major H&S and 200-dma support as well, dragged by the local banks which have the largest exposure to Greece. The one word no one wants to hear during the weekend is restructuring (synonymous of default) as it would clearly let bondholders know that they are fair game... happy days for those holding PIIGS debt if that happens. Maybe the ECB and German politicians could give Dick Fuld a call to see what he thinks, at this point though hopefully they know th answer.
Commodities curiously did not share the late day panic, and Gold was joined by Copper and Oil for more upside for a change. We have reached the 1,185/1,190 resistance in Gold but at this point there are few reasons other than madness out of the financial reform committy that can prevent a run towards new highs.