MorningWord 1/17/12

by Dan January 17, 2012 9:02 am • Commentary

For as long as I have been in this business, living through the; Asian/Russian debt crises/Long Term Capital/ internet stock market bubble in the late 90, real estate bubble and our own debt crisis here in the previous decade and now in the last year with the European Sovereign debt crisis, the question that I have been unable to answer or have adequately answered for me is the the U.S. economy and capital markets, the tail wagging  the dog?

In times like these it seems like we are not and the truth is, the answer to the question does not by an way shape or form help make you money in the markets, but recognizing who’s driving the train can most certainly help you make better informed trading decisions on a day to day basis.

Overnight, even-though China posted their weakest GDP reading in 2.5 years, the 8.9% print was higher than the forecast and launched a massive rally in the Shanghai composite of almost 5%.  Investors are clearly seeing the negative as a potential positive, more easing.  While the Shanghai Composite is up about 4.5% ytd, it is still down about 25% from its April 2011 high and only up about 7.5% from the 52 week lows.  So I guess my point here is that while China is grabbing the headlines this morning, their equity markets have a ton of “wood to chop” to get out from under the bear market they are currently in.


1 Yr Shanghai Comp chart from Bloomberg LP


Taking a look at some of the other dogs in the Pound this morning, Europe is trading fairly well for the second day in a row since the downgrades of many EU nations debt ratings from the venerable Standard and Poors organization.  Since Friday’s close, the DAX is up about 3% seemingly unfazed by the fact that not only will many EU nations pay more to borrow but so will the EFSF.  The DAX much like Shanghai has some “wood to chop” getting out from under the bear, with the index sitting some 19% below last years highs, but for the first time in months trading within a couple % of its 200 day moving average and quickly approaching the massive support/resistance level of 6500.

1 Yr DAX chart from Bloomberg LP


SO what to to with U.S. equities? I suspect we will have that answer in the coming days and in some ways we may continue to under-perform both the upside and downside moves that our European and Asian friends have been subjected to over the last 12 months.  Our markets reaction to continued weak bank results and any negative surprises similar to what we saw from multi-nationals like ORCL and INTC in December should set the tone for the coming months.  At this point it is a wait and see in my opinion I see no real advantage to digging in too hard on either direction at the moment.  As I have repeatedly stated in this space, if you think for a second that the lows are in for the year and that we will not be down at some point on the year, than you better think again. I am in the camp that there will be a much better entry point in the coming weeks for U.S. equities, but the difficult question where does the sell-off begin, here or above 1300 in the SPX?

I think it is important to note that as of 9am, the DAX is up 3% in 2 days and Shanghai up a little more than 5% and our futures are only up 70 bps.  Ask yourself who is wagging who here if you want, but our equity markets seem a bit tired and not as willing to climb a wall of worry.