Reality, Spin, and Market Direction

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin's Daily Trading Report, please click here.

The SPX made a 956.23 intraday high last Thrusday but closed at 944.89, and then 946.21 on Friday, with only 858mm shs trading on the NYSE which was the lowest this year, so the 923-950 zone and 10 day range remained intact starting this week. NYSE volume has been declining for 3 weeks with the average weekly volume going 1.48 bill shs, 1.37, and then 1.09 last week.

Contracted volatility usually precedes sharp moves, and we saw some of that yesterday with the -2.4 SPX decline to close in the bottom of the key price zone at 923.72 after a 919.65 intraday low. During expiration weeks there is usually at least one significant % price move, especially during a Quarterly expiration.

The most significant factor moving the market continues to be the inverse relationship of the market and $US dollar, especially for the commodity sectors which have been the driving force during most of this rally, and also crude oil (WTIC) which is trading above $70 per barrel. On a price basis the equity markets have essentially ignored the negative change in news the last few weeks such as rising Treasury yields, and a 30 year mortgage rate that hit 5.76 last week, which has brought the refinancing boom to a screeching halt, as well as expected new home purchases. The average shorter work week in hours means there is less buying power for consumers who are 70% of the GDP.

Also, it is quite evident that the Geithner PPIP toxic asset program is a failure so far because the Banks essentially won't sell the assets at discounted prices from the artificially marked up prices due to the change in the mark-to-market rule, which just kicks the capital problem down the road a piece. Obama's mortgage plan was to keep the 30-year rate below 5.0, and that is also now failing. The overly optimistic economic estimates by the Obama dictatorship are sinking fast such as the estimated 8.9 unemployment rate for 2009, which is now 9.4, and 10.3 for year ending 2010, which looks like that will happen in 2009.

 There are huge tax increases coming to help cover the cost of the massive social programs in the works, so you can bet that this will sink the economy even further, because the Government estimates of growth, debt costs, etc are way too optimistic versus the reality of this "Derivative Meltdown". The spin right now is about "green shoots", but the reality is that we have a GDP of about $14 trillion, a probable $1.8 trillion budget deficit this year, and looking at another $10 trillion in debt, so what color are those shoots again?? The fact is that those "green shoots", and there are some, are occurring as only 5% of the stimulus money has been used, not to mention the estimated $50 billion in waste or fraud from stimulus funds, as told to us by none other than the great neophyte Joe Biden folks.

The Generals and hedge funds have tremendous incentive to keep this market from correcting until after the 2nd Qtr June mark up, and 6 month report card. However, the $US dollar inverse price action will be the most significant catalyst as to how Q2 ends relative to the current trading range. The USD (US Dollar Index) closed at 81.18 on the current rally from 78.38, and has resistance at 82.50-84. If the Generals do push the SPX higher into the end of June and the July 4th holiday, it will be followed by a sharp "air pocket" like sell off, led by some rotation out of the leading sectors by hedge funds and professional traders.

 This market must "go down before it goes up" in a Wave 3 advance, because the lower levels, and by that I mean at least a .382 correction to the 667 low, will attract a rush of money that missed most of this rally since the 3/6/09 667 low.

Have a good trading day!

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