TBTF October 6, 2010 - It's the final countdown

Too Big to Flail

October 6, 2010

It’s the final countdown, We are leaving together,  It’s the final countdown, Oh, it’s the final countdown (Europe – 1986)

It looks like we are leaving, the trading range on the S&P that is, but if it’s together with Europe remains to be seen. The S&P closed markedly above its 1.150 resistance level after having failed to do so over the past 2 months. The question now for us Europeans is if the DAX will follow suit. It closed 135 points (a good 2%) below breakout levels, so I don’t see it happen quickly, not today anyway. But if macro news out of the US remains as expected or a wee bit better then we might have a fighting chance this week.

US equities rallied as a better than expected ISM report showed more expansion than expected and a substantial QE package by the BOJ left investors wondering if this is a prelude to more QE from the FED early next month. It’s funny to see how traders refused to look at all the ‘bad’ or not so good news today.

First of all there was news out of Brazil, where the finance minister, Guido Mantega, after warning that an all out currency war, between leading world economies, was on the verge of breaking out, impose fresh new capital controls on inflows of foreign capital. He doubled an already existing financial transactions tax on money entering the country to invest in fixed income instruments, from 2% to 4% The measure is designed to prevent further appreciation of the Reaal. Next thing you know there was the BOJ lowering it’s base rate to between 0 and 0.1% and unveiling a YEN 5 trillion QE program designed to stem the rise of the YEN and to get their economy going again. Gold set new all-time highs again as a new QE program by the FED would almost definitely lead to higher, much higher inflation in the US. But stocks took all of this in stride and put on their best performance since Sep 24.

Dow +1.8% S&P +2.09% Nasdaq +2.36% EuroUSD 1.383 WTI $82.80 Gold $1.340

Within the S&P all sectors were positive with Utilities being the main underperformer (+1.18%) and Basic Materials the best performer for a second day (+2.88%)

What to expect for today: as I mentioned earlier, the S&P has cleared the 1.150 hurdle on a closing basis, which should/could lead to the highs of the year reached April 26 (1.220). Will Europe participate in this rally and break its own respective resistance levels. The DAX is 2% below its own resistance at 6.350. It seems a bit much to break those levels today, especially since we were up almost 1.5% yesterday as well. A good labor market report could be a trigger to venture into new territory. It seems Europe is lagging the US markets all of a sudden, seeing as we were more in sync hovering around resistance levels last week. I suspect this can be explained by the fact that in Euro terms yesterdays rise in the market was far less than it was in USD. As you can see the two indexes have been performing equally well in euro-terms since April of 2009

Happy Hunting & Let’s be Careful out there !!!