ForecastStocks:
The European debt contagion remains front and center. Spain and Italy bond yields remain high, but are off their worst levels after the EU Summit produced a vague pan-European banking supervisor and other ways to lower periperhal European bond yields. This is positive in the short-term, but will only provide a respite to lower stock prices. Also, China remains on a growth deceleration curve, with growing concerns of a very hard landing — various estimates are centering in on the 7.0% level and even lower.
Strategy: The S&P 500 remains above long-term support at the 160- wma at 1203; which delineates bull/bear markets. However, the 200-dma support zone at 1266-to-1278 remains the bulls “Maginot Line,” while overhead resistance at 1340-to-1360 has also proven itself as resistance. However, we expect this zone to be ultimately given in the days ahead, with a short-term target of 1390.
World capital markets are on balance "higher" Tuesday morning as the market waited for Fed Chairman and his semi-annual testimony regarding the state of the US economy and monetary policy. In the “old days” this was referred to as the Humphrey-Hawkins testimony as it was a mandatory appearance before the Senate and the House of Representatives; now it is merely at the leisure of the Fed Chairman. Asian bourses were higher – including China; European bourses are all higher – except the UK. However, the S&P futures are higher by +6 points, while the US dollar is quiet; which means commodity prices are “quiet.”
One should fully understand that Dr. Bernanke’s every word shall be parsed and hung on to determine whether QE-3.0 is on the table and if so…when. In all probability, if it is going to occur, then it shall do so quickly given the window is clearly narrowing from a political perspective as the November elections are right around the corner. We’ll be sitting with a pot of coffee listening to the testimony, for it is always entertaining to listen to Dr. Bernanke calmly answer the asinine and in many cases “repeated” questions of many of the Congressional idiots.
Trading Strategy: Nothing has changed; Monday’s weakness was simply the market relieving a very short-term overbought condition, which was warranted after Friday’s sharp rally – a rally that did manage to begin from important support levels. And today, given Dr. Bernanke’s testimony – we are likely to see stock prices move higher.
To read the entire report, please click on the pdf file below.