Sunday, August 14, 2011

Market Outlook - Long from Thursday

Consumer sentiment worsened sharply in early August, falling to the lowest level in more than three decades, even though retail sales posted the biggest gains in four months in July, separate reports on Friday showed.

Underscoring divisions at the central bank, one top policymaker on Friday said he had cut his forecast for economic growth, even as another said he saw no economic need for new monetary stimulus.

Business inventories rose slightly less than expected in June, suggesting firms remained cautious about future demand at the end of the second quarter.

Global financial upheaval was on the agenda on Friday when President Barack Obama met with top executives from the U.S. business community, the White House said.

If history is any guide, another oil-induced recession may be just around the corner, at least for the United States and some of the other developed economies.

Minneapolis Federal Reserve Bank President Narayana Kockerlakota said on Friday that he dissented from the U.S. central bank's decision this week to keep interest rates low until mid-2013 because he felt more policy easing wasn't needed.

During the trading day on Friday, there were rumors that Standard & Poor's would strip its AAA rating from the U.S.

Purposely orchestrating the downgrade after all markets had closed, it officially did so, leaving traders across the world wondering how markets would react.

U.S. stock futures opened off with losses of more than -2.5% and after a several-hour rebound.

On Friday there were  other sovereign downgrades from AAA status. There isn't much history of these events, but from the reactions in the local stock markets were not necessarily bad, especially during the next week or so.

Of course, this time is different due to the U.S.'s status, or former status anyway, so we'll just have to wait and see how things unfold in the coming days.

For what it's worth, there have been 9 other times in their 30-year history that the S&P futures dropped 5% or more in a week, slumping to at least a six-month low, then gapped down -2% or more on the open.

8 of those 9 days closed the day higher, and were also higher 3 days later. The average return from open to close was a whopping +3.1%, with the loser being -2.2% (from October 6, 2008).

Here are the dates, along with the day's return from open to close:

9/21/01: +3.5%
6/26/02: +2.4%
7/24/02: +8.5%
1/22/08: +3.3%
1/23/08: +5.4%
9/16/08: +4.1%
10/6/08: -2.2%
10/8/08: +0.3%
10/10/08: +2.3%

The crash in '87, when the futures lost -24% of their value between the open and close, just barely missed this study because the S&P hadn't closed at a six-month low the day before the crash. But it was very close, so at least worth mentioning.

Looking at the intraday pattern of some past crashes and mini-crashes, it's pretty apparent that things could get very ugly if the low set during the first hour of trading is broken later in the day.

It shouldn't be too long before traders start focusing on Tuesday's FOMC meeting and the potential for the Federal Reserve to say something different than they have been saying.

But Monday, especially the first few hours, will be dominated by traders re-positioning in a new world without a "risk-free" USA, and nobody really knows what that's going to mean. History says we should rebound in the days ahead, but history isn't much help in a situation that's basically unprecedented.

In previous short-term outlook, I had suggested: "...overall outlook for tomorrow remains bullish..." - Friday, the major indexes moved higher.

5 minutes is showing advancing  oscillator readings at session's end. Positive money flow on this chart would suggest the possibility of positive trading on Monday after the market open.  However 30 minutes charts are showing declining  reading at this moment. Taking into account the most recent bullish proprietary accumulation I would say that despite positive outlook on 5- and 15-day charts, overall sentiment is slightly in favor of Bulls.

My Position is Long , targets and other details vailable upon request.

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