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 markets are weakening. The Eurozone remains mired in inaction, athough it is 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 1363; and the standard 200-dma support level at 1562. 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 MIXED AGAIN THIS MORNING as the overwhelming consensus continues to blame the Syrian issue for the volatility seen on a daily basis in the equity markets. Overnight, we’ve seen the US Senate Foreign Relations Committee reach a “draft agreement” authorizing the use of military force. The US House is said to have a very similar agreement, but the scope of engagement is said to be less than that of the Senate. We should expect a vote either today or tomorrow in favor of force, and it should be in place before Mr. Obama travels to Sweden before he attends the G-20 meeting in St. Petersburg…hosted by Mr. Putin – a Syrian ally to be sure.
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