STOCKS
The fundadmental backdrop is likely to be volatile: Italian elec- tions results will be tabulated tonight; U.S. “sequestration” starts on Friday; and we see Fed Chairman Bernanke in front of Congress this week. These will dominate the headlines in the short-term, but longer-term -- the euro-zone recession, the likely decline in corporate profitability and the Fed’s tapering of QE-4 will serve as headwinds.
STRATEGY
The S&P 500 remains above the 160-wma long-term sup- port level at 1278; and the standard 200-dma support level at 1407. Col- lectively, with the breakout above the Sept-2012 highs at 1475 has run into major overhead resistance, and has found “rough sledding” over the past several days. This, coupled with our models rolling over suggest this is a topping process, but it is still too early to definitively confirm.
CAPITAL MARKET COMMENTARY
WORLD MARKETS ARE HIGHER THIS MORNING as market participants shake off the decline of two days prior, and attempt to regroup. However, we fear this calm will not last for very long, for it “feels like” merely a resting point on a decline to lower levels in the weeks ahead. Noth- ing has really changed; Italy remains in a state of “uncer- tainty” that will take unexpected twists and turns; the US sequestration will go into effect on Friday, which is all sur- rounded by the fact that US taxes have risen and gasoline prices are broadly higher. Outside of this, the markets are keying on very little.
That said, we’ve included two charts this morning in the lead positions: copper futures and the Italian FTSE MIB Index. And we’ve done so to illustrate that copper is trad ing in a pattern that is considered rather bear- ish -- perhaps foreshadowing a material slowdown in the U.S. economy due to sequestration...or perhaps a “ding” to inves- tor sentiment related to sequestration. As for the Italian index, it has broken down, but it is at another critical inflection point that if vio- lated -- will result in a test and likely break of the lows some -15% below current levels. Perhaps this chart is foreshadowing more un- certainty in the Italian elections. We’ll under- stand in the fullness of time, but these charts should concern one at this juncture.
On the U.S. ECONOMIC FRONT, January Durable Goods were released this morning, and they were volatile as usual. The headline fig- ure dropped -5.2%, but this was due to a - 34% decline in aircraft orders. If we look at decline towards the 1460-to1465 zone in the days/ weeks ahead, which will be the first real test of major support. If it holds, we’ll likely be inclined to consider taking off a portion or all of the TWM position; and at that point consider tentative longs for a trade higher. Regardless, the models suggest that this is perhaps the beginnings of a topping process that will lead to an intermediate-term decline. Hence, we’ll remain nimble.
Good luck and good trading, Richard.