Salting the Well
Research for Online Investors

6/8/12

Markets opened lower this morning because of surprises in some economic reports out of Europe and the U.S. market’s reaction to Bernanke’s testimony before congress yesterday.  It is silly that traders look to Bernanke to telegraph more QE, but that is the reality.

Overnight economic reports showed Dutch Manufacturing Production fell 2.7% (it was up 3.0% in March).  Italian Industrial Production fell 1.9% after growing 0.6% in March.  German exports fell 1.7% in April after recording a gain of 0.8%.

The U.S. Trade Balance deficit came in higher than expected at $50.1 billion.  Economists expected minus $49.5 billion.  Shortly after the market opened Wholesale Inventory numbers showed a build of 0.6%, which was higher than expected.  President Obama held a press conference.  He used the opportunity to bash the “do nothing congress.”

The President never mentions that the House of Representatives has passed over 30 bills, but the Senate never takes them up.  One would think the “do nothing” applies to Harry Reid and the Senate.

The market edged higher during the President’s news conference as he talked about the administration’s efforts to cajole the eurozone.  We did get a little spike as news crossed the wire that Treasury Secretary Geithner was encouraging a European TARP program.  Maybe Geithner thinks Europe can find some “shovel ready” projects to waste money on.

Rumors are rampant the eurozone will announce a rescue for Spanish banks over the weekend or a “growth” plan will be announced.  Maybe it will be a “European TARP” program as the U.S. Administration wants.  We don’t know what to make of these rumors.  Are they just hopes?  Are some hedge funds spreading the rumors to bring in retail investors?

If a monetary operation is announced over the weekend, world markets will be up sharply on Monday.  If there is no announcement, the markets could be down on disappointment.  The JP Morgan derivative trades that are upside down to the tune of two to five billion dollars are against European financial instruments.  Rumors are they would improve and help JPM out of the trades if and when the eurozone offers financial aid to weak countries.

Ask yourself, would JPM “salt the well” if it aided their market positions?  One of the easiest ways to make money is to drive the retail herd one direction and short against them so you make money when they abandon positions at a loss.

We don’t know how the rumors will play out, but thought a chart might be a good idea.  Here is the S&P 500 for the last three months:

We have drawn in the lower and upper trend lines.  You can see the market pushed through the upper trend line yesterday.  We are holding it today.  This may open the market to challenge 1331 (horizontal line).  We also show the 200-day moving average at 1288.

Lack of good headlines over the weekend, or a bad headline, could knock the market back down into the descending channel.  You can see where that leads, and it is not pretty.  We would expect support in the usual places the market paused in the last two weeks.  Expect support at 1291, then 1285 then 1266.  We don’t know about next week but still believe the market will test 1257 this summer.

Mailbag:
I enjoy your commentary, but the Nancy Pelosi remark was out of line, regardless of her politics.---subscriber L.R.

John’s reply:  But admit it, wouldn't you like see someone throw a glass of water in her face sometime?  It would be Monty Python like to watch her exasperation.  My cat fell in the pond last night.  She was not happy, reminded me of this.  Maybe I will change Frenchie’s name to Nancy.  I am just not going to pay for plastic surgery!

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