STOCKS: The world economy is muddling through. The US payroll tax increase and sequestration are headwinds to the US economy, China is being pressured by Japan, and both the US and Chinese housing market are weakening. The eurozone remains mired in inaction, athough showing signs of growth. Quite clearly, we feel risk is being mispriced at current levels given the economic backdrop and developing pressure upon corporate revenues/margins/earnings. At some point, the market will view the central banks will be non-sequitur.
STRATEGY: The S&P 500 remains above the 160-wma long-term support level at 1382, and the standard 200-dma support level at 1595. But perhaps more importantly, the distance above the 160-wma “falied” at the +23- to +25% zone that is our “bubble-like rally” threshold. Hence, a correction of some proportion is forthcoming — perhaps -15% or more.
WORLD MARKETS ARE ALL LOWER THIS MORNING as the US government shutdown continues apace, with the looming October debt ceiling starting to put many market participants on edge. In December2012/January2013 circumstance, the Republicans caved in and the markets went materially higher and quickly. However, this particular circumstance feels different for the time being, with neither side seeming to blink, nor both sides providing any positive rhetoric. They all are digging in to entrenched positions much in the manner as World War I trench warfare was propagated. Ultimately the government shall open, and the debt ceiling will be raised. But, during the intervening period this could become extremely unsettling for the markets.
All it takes is for sellers to appear en masse, and buyers to go on strike. Many believe there is a better entry point, and certainly there is a better risk-reward situation somewhere in the weeks ahead.
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