Yesterday the magnet at the pivot points pulled the indices to them, the INDU 12250, NDX 1750, etc. The market makes big moves intra-day – usually to the downside and then rallies back at the close to the magnetic pivot points. I wouldn’t bet on this continuing to happen as this market fundamentally wants to go down but optimistically wants to rally. These are very KEY support areas as I mentioned yesterday – if we cannot hold them through the rest of the week, well strap on a parachute because we will probably head lower. It doesn’t seem that the short-sellers are going to be forced to cover and the major firms don’t have the cash or leverage to start getting balls out long this market (nor do they want to risk it). My over-under is 70/30 we break the support and go lower. 30% for a short-term short-cover rally up to resistance – but that percentage factor is narrowing fast.
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ECB vs. the Fed
There are two schools of thought, the ECB (and London) are concerned about the economy from a inflationary standpoint. Their stance is largely the economy and consumers as a whole. They have not interfered (for the most part) with their lending firms that have failed, taking a more none socialist view. This morning they have both announced they will NOT be lowering interest rates. On the other side of the pond, Bernanke is cutting rates and not concerned about rapid inflation, his focus is keeping the lenders and banks solvent. I am sure there is more pressure on the administration (both Dems and Rep) because they rely on big business to get elected and several governmental key positions are held by ex-CEOs of these troubled financial institutions. Maybe a correct observation would be that the ECB is less partial to big business because it is less influenced by local business politics, since politics still remain regional to the country and not to the EURO currency governing body as a whole. However, that still leaves England which has also taking the same stand and is not cutting rates.
My personal opinion is the ECB and London have got it right. What has Bernanke’s rate cuts done for us, other than help the lending firms stay (semi-solvent)? The dollar is going down (fairly fast), Mortgage rates are actually up, credit has tightened, local & state governments are facing bond issues, it hasn’t helped the bond insurers, etc. One thing for sure is that NONE of the rate cuts have helped the man on the street and further more they have hurt him by increasing inflation (via sending the dollar into the toilet). The slow .25 rate cuts are like putting a Band-Aid on a hemorrhage.
One thing is for sure the dollar is getting smacked this morning after the ECB and London remained unchanged on rates, thus strengthening their currency!
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Bond Insurers – should they keep their AAA rating?
Ambac and MBIA have maintained their AAA rating, when in reality they should both be junk. Why do they maintain it? Why do we continue with this charade? Well, many pension funds and other investments HAVE to have bond insurance. And the insurers need to maintain the same credit rating or higher to insurer those bonds. What happens if Ambac and MBIA losses their coveted AAA status? Pension and other funds will be forced to sell huge positions into a market where there is no buyers – thus a serious series of dominos will start falling.
Ambac has now sold half their company on the cheap just to maintain that rating. Many suspected banks to come to the rescue and bailout the bond insurers, but these are the same banks that rely on the bond insurers in the first place. It is kind of silly – can you imagine your car insurance company asking you for money to cover the principal of your car that you are already paying premiums to cover? It’s pointless to even have insurance and pay premiums – if the insurance company doesn’t have any money to cover losses – and that is exactly what is going on.
Right now it is all a silly game about a rating “AAA” – that really only looks good on paper to me some contractual obligation. If this doesn’t clearly tell you that Moody, S&P, and Fitch ratings are no longer worth anything – I don’t know what does. Letting the insurance companies keep their coveted rating is now just for show – but I don’t know how a rating will keep the losses from happening.
Expect pressure in the bond insurance sector!
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Futures Pre-open
It looks like we were seeing some strength with Wall-mart reporting an increase in sales as people look for bargains, however I think the ECB and London keeping the rates steady along with the bond insurance problem far from over has put some pressure on the market. The futures are front running the cash by 2 points going into the opening. Expect the futures to bounce up a little to meet the cash as the ARB narrows at the opening.
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Support / Resistance
The Magnetic Pivot Points are still holding and the Hidden Volatility (which we see intra-day) is loading up. When the spring is release expect a huge move, as I said 70/30 downside – is my thought.
INDU 12250 (If we can’t continue to hold above this key support – then 12000 will be visited very fast, we saw that on Tuesday intra-day and we can get their again very quickly)
NDX 1750 (This is a pivot point and with the higher volatility in the tech sector visiting 1775 or even 1800 is realistic, but those would be shorting opportunities. I think 1700 is in the cards.)
SPX 1325 (Key support – if we break then it’s 1300 – which we HAVE to hold if you believe that the economy is doing significantly better than I think.)
RUT 700 (This is the scary one as the broader market looks to drop to 650 – and there is nothing below 650 to indicate this is a good place to get long in this economic condition)
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Conclusion
Traditionally – these are great areas to get long (from a technical standpoint) – but with the economic slugfest, bond insurers, dollar, gold, oil – well the market is a light weight in the heavy weight division. That is why I am giving a greater likelihood to head south – again in normal economic times – this is a screaming bullish area, but these are NOT normal economic times. That is probably why we are holding fast at these levels.
It looks like the democrats are still trying to figure out who their front runner is and if the republicans have anything to say about it (Gov. of Florida) then it will be Hillary (since they think she would be the worse of the two for McCain to go up against). Of course I wouldn’t be surprised if Hillary, if she loses by a slim margin bring legal action into it and try to include both Michigan and Florida (which currently do not count). The Republicans are just hoping for more chaos in the democratic party and they might get it. It is funny that the Democrats fought so hard in Florida during the President Election about “Every Vote Must Count” – they spent millions of dollars and time about recounts and this and that. The funny thing now is that they have disenfranchised the Florida voters by saying their vote does NOT count, just because they moved their date up. Silly and makes for more volatility.
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