STOCKS:
The fundadmental backdrop is likely to be volatile: the Italian election is not yet resolved in terms of a sitting government; U.S. “sequestration” is in place; and China is moving to “dampen” their housing market. These issues, coupled with the Cyrpiot depositor saga. will dominate the headlines in the short-term, but longer-term -- the euro-zone recession, the likely decline in corporate margins/ profitability and the Fed’s potential tapering of QE will serve as strong headwinds.
STRATEGY: The S&P 500 remains above the 160-wma long-term support level at 1287 and the standard 200-dma support level at 1424. Collectively, with the breakout above the Sept-2012 highs at 1475 has run into major long-term overhead resistance, and should find “rough sledding” in the weeks ahead as a top is formed. This, coupled with our models in increasingly negative lights puts the risk-reward to the downside.
ASIA CLOSED HIGHER; EUROPE IS TRADING LOWER as there appears to be schism erupting between the high-powered money policies of Japan and the US versus the continued economic decline in Europe and the volatile situation in Cyprus. First, we should note the FOMC decided to leave alone its o/n fed funds rate and left in place the $85 billion/month asset buying program -- no surprise whatsoever. Second, Europe is faltering due to the ECB issuing an ultimatum to Cyprus that they must have a deal in place by Monday or they will not provide any liquidity to the Cypriot banking system.
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