Friday, September 30, 2011

Early Look: Stocks Look To End Quarter On A Down Note

The market opened under selling pressure this morning, following its cues from Asian markets which were down overnight and European markets which are lower across the board this morning. So much for the German vote of confidence on the EFSF appeasing the markets.

We have seen a small bounce in the first hour of trading after some better than expected economic reports. The Chicago PMI reading improved to 60.4 in August, well above the 54.0 consensus. And the UofM consumer sentiment reading was revised upward to 59.4 from an earlier reading of 57.8.

Still stocks are set to finish the quarter on a down note. This quarter's decline on the S&P of roughly 12% is the biggest decline since Q4 of 2008. Pretty ugly. With all of the bad news getting priced in and bearish sentiment reaching extreme levels, one has to ponder the possibility of another October bottom and some sort of year-end relief rally.

The dollar is stronger today, and that is weighing on commodities. Ag commodities are much lower today on the recent crop report. Oil prices are lower below $80.50 so far, and gold prices are also soft near $1625.

The 10-year yield has slipped back below the 2.00% level, currently at 1.92%; and the VIX is spiking another 5.5% to 41.0. It still hasn't surpassed its recent highs, but the persistent high levels in the VIX are disturbing nonetheless.

Yesterday there was a lot of chatter about the slowdown in China becoming more pronounced. China sovereign CDS prices have really been spiking lately. If the wheels come off in China, I think those who are being complacent about a recession in the U.S. might rethink their stance. We shall see.

Trading comment: The trading range for the SPX continues to coil and sets up for a breakout fairly soon. I'm worried that we have tested the SPX 1120 level 3 times now, and a fourth test might not hold. That said, if we can get to earnings season and get some positive earnings reports, that could be a catalyst to breakout over the 50-day average which has acted as resistance for the last two months. As such, I am trying to stay balanced and nimble in the interim without making any big directional bets.

long SH


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