Time to be Cautious
Research for Online Investors

12/08/11

The eurozone debt crisis has been making headlines for 22 months. In all that time, in all the rescues, in all the proposals; have the politicians lived up to the rhetoric and actually stopped the crisis in its tracks? The answer is why we are negative on the market right now.  Added to our pessimism about the eurozone is an observation that many investors are bullish.  Crowds are rarely correct.

The chart above shows the S&P 500 over the last five months.  We have drawn in the upper downward sloping trend line across the tops of the market and the upward sloping line along the bottoms of the lows.  There is also a red line on the 200-day moving average.

Notice the 200-day moving average meets the downward sloping upper trend line at 1261.  The lower trend line (circle) sets a lower target for our market at 1173.  If the market moves lower out of disappointment over the latest eurozone plan to rescue troubled countries, 1173 will provide strong support.

If the market does bust through 1261 and hold it we can see a “Santa Claus” rally to 1283 (23.6% retracement of rally from 7/1/10 to 4/29/11) with a possible high of 1324 (half the difference from the high on 10/27 and low on 11/25 divided in half and added onto 1261).  Sounds complicated.  In this case we can close our short etf positions for a small loss and enjoy the ride up or we can ride them out as the rally may fail at any time on a headline.

Technical analysis is simply using mathematical formulas to predict future movements of a market.  Technical analysis is not influenced by headlines or central bank actions.  Done correctly, technical analysis has a 65% success rate.  The greatest attraction to technical analysis is it allows mere humans to think they can predict the future based off the past, and that is attractive to our “rat brains!”

The market was up strongly in the premarket, after the European Central Bank cut interest rates to 1.0% and Mario Draghi said the ECB was ready to extend loans to eurozone banks for up to three years.  This was impressive as 12-month financing was the longest previously announced.

Before the market opened, Reuters reported that Draghi said the ECB would not support loaning money to the IMF to increase their balance sheet for support of eurozone countries.  Last week Draghi hinted the ECB would perform ‘further actions’ if eurozone leaders agreed to tighter budget controls.  The market interpreted this to mean the Germans were prepared to allow some quantitative easing if a central eurozone bureaucracy had the power approve issuance of debt by weak countries.

This morning, Draghi said “I was surprised by the implicit meaning that was given (to my comments).  A new fiscal compact, compromising a fundamental restatement of the fiscal rules together with fiscal commitments that euro area governments have made, is the most important precondition for restoring the normal functioning of financial markets.”

We are negative on the market because we believe the market will be disappointed in the plan proposed by German Chancellor Merkel and French President Sarkozy.  According to news reports, they are going to request changes to European Union treaties.  The debt crisis will be a memory before 27 European Union parliaments could approve changes.  We believe approval is only possible in countries that are at the center of the debt problems.  Why would a country give up sovereignty over budgets unless they have to?

Looking to next week, the Federal Open Market Committee (FOMC) is meeting Tuesday.  Some traders expect another round of quantitative easing.  We do not, but if Bernanke fires up the printing presses the bulls will rip the market higher.

We are also negative on the market because…as Wilford Brimley says “It’s the right thing to do!”  We sent an alert to our Long-Term subscribers last night to buy a leveraged short ETF to protect our portfolio.  We didn’t get it at our price this morning…but we are patient.  You can get in on our 20 recommended stocks and market alerts.

Quote:
Taxes must, in the end, fall upon the consumer.---Fredric Bastiat

John

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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