Monday, December 20, 2010

Market Outlook

Sunday, December 26

Santa never fails to deliver :

Short Trade developed as planned

First Target reached and filled for + 8.5 Pts

Wednesday, December 22nd, 2010

SOLD 1254.50 ESH11 - March '11 E-Mini S&P500 Futures- New Swing Position

Setup, Targets and Stop Loss  as described to subscribers

Total Lunar Eclipse tonight on Winter Solstice -- last time this happened was 465 years ago (1545), coinciding with crop failure in China

Some market observers suggest the market is running of steam even in the face of a virtual barrage of good news. Even the now finalized tax cut bill brought little further upside momentum. The market has now likely priced in an extension of the Bush-( the alcoholic )-Era tax cuts, positive retail sales, higher consumer confidence, and positive factory production data, and of course the Fed’s second round of quantitative easing 'QE2' (with the Fed performing Permanent Open Market Operations (POMOs) virtually every day, sometimes several such transactions in a single session).

Note that this will be an abbreviated trading week. The US stock market will be closed on Friday in observance of Christmas.

 Friday’s Options Expiration was uneventful and, overnight, after being down on a weak Asian showing, the ES rallied strongly to new highs in the European session. With critical support holding last week, the ES is in good shape to resume the rally as emailed to subscribers on Sunday.  The Institutional Key Numbers worked as expected last Friday and today.

 We do have one new warning, however, after review of the Fed’s weekly data release.  92% of the Fed’s $48.5 billion in Treasury purchases over the two week bank reserve period of December 2-15 was put on deposit right back with the Fed to earn interest at 0.25%.  This represents a defensive posture for the banks going into year end, and if this continues (we won’t know until the December 30 release), any correction in equities could quickly become material without the Fed’s money printing floor. 

The Federal Reserve Bank pulled off two separate POMO(permanent open market operations) operations today for a total purchase of $13 - $18 billion worth of U.S. Treasuries. This action by the central bank has helped to inflate the stock markets higher since it was announced by the Federal Reserve Bank Chairman Ben Bernanke on August 27th, 2010. It is rather obvious that the central bank wants to keep the mood very jolly into the Christmas holiday which is on December 25th, 2010. The Fed also has a double POMO operation scheduled for tomorrow. This has been the first time that the Fed has orchestrated back to back double POMO injection days since QE-2 began.

In order for the Federal Reserve Bank's quantitative easing program to work for a while it will require the U.S. consumer to spend money. At this time U.S. consumer spending accounts for 70.0 percent of the gross domestic product(GDP) in the United States. Without the American consumer spending money this inflation rally will be a complete failure. Deflation happens for a reason and it is a real warning that something is fundamentally flawed with the current system. However, instead of letting supply and demand dictate where and how the markets will trade the central banks artificially inflate the markets with low interest rates and the purchasing of Treasury bonds. This causes inflation and a wealth effect. The logic behind this method is once people feel better because they see their 401K's and retirement plans going up they will begin to spend more money and income. The Keynesian system that has been in place for so long can continue to function as it has for so many years.

The one problem with this theory is that every other central bank that has tried this method has been ultimately unsuccessful. Japan has been battling deflation since the late 1980's. In 1989, the Nikkei Index traded near the 40,000 level. Today the Japanese stock market index trades around the 10,000 level. This is nearly two decades of sideways to lower action in the second largest economy. What has saved the Japanese people has been the high savings rate and the low debt load by the Japanese citizens. This is just the opposite of the U.S. consumer who is still loaded with debt and has a very low savings rate. Enjoy the inflation rally while it lasts. Unfortunately nothing lasts forever.

My strategy remains the same as explained to subscribers.
Will resume the Intraday Price Action Reviews with Setups  as soon as more comments are added to the Blog.

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