Both Fed Chairman Bernanke’s remarks yesterday and President Obama’s speech last night about his jobs plan; combined, failed to reassure the market that a solution to the country’s economic woes was at hand, and the market once again closed sharply lower. The euro slid to a ten-year low versus the yen and a six-month low against the dollar, as concern grew about Greece’s debt crisis. European bank and sovereign credit risk reached all-time highs as 10-year Treasury yields fell to a record low.
While I have previously made reference to the bad start the market has gotten off to this month, September 2011, now has the distinction of being the worst September since S&P began tracking and reporting the data for its benchmark index. Friday's reported volume totals were heavier on the NYSE and on the Nasdaq exchange, a clear indication of distributional selling from the institutional crowd, and leadership contracted further, raising more doubts about the market’s ability to sustain any kind of a meaningful rally .
Last Friday saw a serious waterfall close lower, and this Friday was no different, as traders decided to reduce their exposure before the weekend. As was the case last Friday, headline news out of Europe greatly contributed to the sell-off. Next week is opex week, and if the market continues to repeat itself, we may see a reversal of the short term trend that is currently underway, as we did last opex. Ahead of the September 21 FOMC announcement, the major economic releases are Wednesday and Thursday with PPI, Retail Sales, CPI and the Philly Fed Survey.
As previously mentioned, the DAX’s weakness and the divergent strength of the $VIX and U.S. dollar were strong clues that the 2 day rally in the ES was on standing on wobbly legs. The market continues to experience large moves in both directions vacillating between oversold and overbought. Short term sentiment readings are once again in the 70 area, which implies that there is a strong chance the market could bounce from these levels. While it appears the shorts have covered some of their positions, there is still a large speculative short interest, that could fuel a rally if squeezed.
Technically speaking, the market held the bottom of the trend channel on both the short term charts and the daily, and as Abigail Doolittle pointed out in the “Weekly Peak” (, there are no less than 3 ways to interpret the ascending formation that is presented on the daily.
1) Ascending Triangle, which implies a QE3 announcement on 09/21 and a move higher by the market . 2) Bear Flag, which suggests the Fed holds pat and does not institute a change in policy, which certainly portends a downward spiral to the 924 level, and 3) Ascending Trend Channel, which suggests the Fed will take “ small steps” in September, while continuing to talk about the potential for a QE3 announcement, if needed.
While the odds seem to be 2-1 in favor of the bulls, the wild card continues to be Europe. The chart of the DAX certainly appears to have already selected option number 2, while the dollar appears to have made a bottom, and the $VIX appears poised to spike higher. IMO, the market has caught up with Obama and Bernanke’s failed policies. They have no credibility left, and they have run out of ways of forestalling the inevitable.