With options expiration over for this month, the stock market is now clinging primarily to the Fed FOMC meeting tomorrow and Wednesday. As noted in last week’s market forecast, if the Fed does not hint at additional liquidity during this meeting we could enter a full-scale bloodbath.
Remember, the primary driver of all stock momentum has been the Fed providing liquidity. The economic data coming out of the US is abysmal (especially since February 2011), housing is a confirmed double dip, unemployment remains terrible (especially when we remove BLS accounting gimmicks) and on and on.
So with QE 2 ending in the coming weeks, only three things are holding the market up from a technical standpoint:
1) The Fed FOMC meeting (and the hope for more liquidity)
2) Second quarter performance gaming (2Q ends June 30)
3) The 200-DMA
Regarding the final point, the S&P 500 is now being compressed between its 50- and 200-day moving averages. We are due for a bounce off the 200-DMA (possibly to 1,300 on the S&P 500) but unless stocks can muster some serious upside momentum, it will only be a bounce followed by more losses.
My suggestion to traders this week is to remain on the sidelines when it comes to stocks. There are too many variables at play for a clear sign of what’s coming. And given the degree of danger in the world, the potential for things to enter full-scale Crisis mode is quite high.
Indeed, the financial system at large is on red alert. Interbank liquidity has begun drying up in both Europe and Asia. Europe is an absolute disaster with more and more Europeans wanting out of the Euro (25% of Greeks, and nearly 60% of Germans). Italy has open discussed potentially dropping out of the Euro, while Spain and Portugal continue to see their debt systems teetering as well.
Meanwhile, here in the US, we have officially breached the debt ceiling. Tim Geithner is now actively raiding pension funds to meet debt demand (a policy he admits will only work until early August).
Aside from this, other countries are rapidly dropping US debt like a hot potato. Russia has sold off 30% of its US Treasury holdings. China has lowered its holdings for five months straight and has even suggested selling off 2/3 of its exposure. And with even legendary bond investors like Bill Gross avoiding Treasuries, we’re rapidly heading into a debt Crisis that will make 2008 look like a picnic.
Which is why if you haven’t already taken steps to prepare yourself and your portfolio for the coming disaster, you need to do so NOW.
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Editor In Chief
Gains Pains & Capital