Running out of steam….two days in a row we rally above those resistance numbers and look strong – then we fall right back down into the close. Yesterday we also saw the VIX get CRUSHED intraday as the market rallied (from 29 to 26.5 = almost 10%) as if the green shoots had taken root and there was no fear. Then as the market fell back off the VIX retraced back. We are certainly at a struggling level to go higher or pull back.
Hidden volatility is ramping – the VIX is pricing in a 1.5% daily standard deviation in the S&P, but yesterday the S&P was trading on a 2.5% standard deviation. The volatility is getting cheap relative to the statistical volatility – that to me spells short-term concern. The options premium is getting cheap (over-all) relative to how the indices are actually moving.
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S&P downgrades the UK!!!
S&P lowered its outlook on Britain from “Stable” to “Negative” – indicating that it might lose its AAA credit rating as their nations debt approached 100% of their GDP (S&P say it is a 1 in 3 chance of credit rating drop). I ask myself how much debt vs. GDP do you really need to lose a AAA credit rating, seems a little subjective. One analyst on Bloomberg said this morning, if S&P is downgrading the UK, the US is probably next in line (with all its printing of money), if debt vs. GDP is a consideration.
Could we see rates increase on UK bonds to attract investments as the UK needs to finance more debt? Also what happens to the Pound vs. Dollar – we recently saw the Pound make a good run up against the dollar – getting close to that 1.60 level.
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Weekly jobless claims
The futures are seeing a little pressure as weekly jobless claims fell by 12,000 to 631,000, from a revised 643,000 the prior week (higher than initially estimated – which was expected to be about 625,000). Additionally – the number of Americans on unemployment benefits hit another record, over 6.6 million – which seems to be increasing. Economist have been slowly raising their unemployment forecast from 9 to 9.6% in 2010.
Chrysler’s collapse and respective job losses was partly to blame, but economist had included that in the forecast. Clearly the job market is not improving, while some of the economic data is showing the decline showing.
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Fed speak –
Let’s look at the consumer and think about them as a collective and business. The consumer is over 70% of the U.S. GDP and about 17% of the world GDP – and it is really the foundation of the economy. The consumer balance sheet is the biggest and the most over leveraged – which recently lost trillions of dollars. The consumer is also seeing a massive shrink of revenue – as jobless claims continue to rise, at that means less revenue to the balance sheet. Most of the credit lines are tapped or shrinking and the equity for the most part (being housing) has been wiped out.
The consumer really has to find a bottom and continue to deleverage before we can see growth.
It seems to me that the Fed is coming quickly to that realization. No doubt they have significantly helped the banks from collapsing – giving them access to the Discount Window, special loans, TARP, etc. But that is NOT filtering to the consumers and that is something they are concerned about. There is some skepticism about the LIBOR as well as a sign of credit easing, on CNBC this morning a regular guest indicated that LIBOR fell because there is no liquidity. Firms have been getting 10s of billions from the government at very low rates, lower than LIBOR – there is no reason to pay up in the LIBOR market if you are getting it cheaper elsewhere. LIBOR is contracting because there is no liquidity. It would rise if the government closed the taps and banks had to go back to each other to get the float.
The FED is seeing this as well and the massive printing that comes with bailing out. The report released yesterday indicated that they are ready to buy MORE treasuries (another $300 billion) should the economy deteriorate further. Clearly the retail sales down, housing starts down, and jobless claims rising – while all slowing – still haven’t found a bottom and more funding is clearly needed. The FED also become more skeptical to their earlier expectations of a recovery and indicated that the jobless rate may remain as high as 8.5% well into 2011. This morning’s weekly number indicates that it might even be higher.
The report certainly sent a negative jolt to the market and saw government bonds rally – as investors expect the FED to print more money to buy more treasuries.
It would seem that the FED, Congress, Treasury, and Administration have all but forgotten about the consumers and have been focusing on Wall Street and the Auto companies. The reality is the consumers of this nation make the wheels turn and drive revenue to companies and is also the prime source of government revenue (TAXES). Unless more focus is geared towards the consumers and the government reduces the consumer debt load – by bailing out banks – it is going to be very slow growth.
To sum it up – the Fed’s report does not spell a rosy picture as to a recovery and is lowering their forecasts.
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Futures Pre-market
The futures are seeing pressure this morning – after the FED report and weekly jobless claims show a recovery further off. Expect negative pressure in the morning.
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Support / Resistance
INDU 8250 / 8500 (We had two days of flirting above the 8500 level – but it really couldn’t close above it – yesterday it was hit into the close and now we are looking to head a little lower at the opening.)
NDX 1350 / 1400 (Again – 1400 seemed to be the area that support could have been built going forward – but we couldn’t keep our head above water. Futures looking lower at the opening – but watch the close.)
SPX 900! (We closed above it, but all eyes are on that 881 level to see if it holds – that is very short-term support. Watch the close.)
RUT 470 / 500 (That 470 level is key – we couldn’t stay above 500 – but watch the close.)
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Gold 950 (We are slowly moving towards 950)
Silver 14+ (We are above 14 – the question is really going to be on the dollar – which continues to show signs of weakness.)
OIL 60+ (Oil came off this morning but is still above 60. I think the dollar today will play a bigger role in oil prices in today’s action)
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Conclusion
Today seems like a test day – we couldn’t close above those resistance levels – and we did make some very solid tries over the last two days – only to close lower. The question is do we visit those support levels this week. It is certainly becoming more volatile, even though the VIX shows different. The disconnect between the implied volatility vs. statistical is reflecting that option premiums are oversold vs. expected standard deviation.
I think today could be a pivotal day between getting back to those resistances or making a good move down to support areas. Those short-term supports in the SPX and RUT is to be watched.
Recovery seems to be further off and even the FED is now on board with that notion.
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