Supportive news out of the US and weak news out of Europe.
Better Statistics in US economy failed to keep the market up
- ISM manufacturing index increased to 51.6% in September, new orders stayed at 49.6%, production rose to 51.2% and employment rose to 53.8%
- August construction spending rose 1.4%, much higher than the expected -0.3%
- All major auto makers reported tremendous growth of sales in US except for Toyota and Honda
The US market closed testing major support. Traders were testing support levels and after hours the SPY broke through the support level at 110. We are within tolerance of our supports. We believe the market is capped at a level 5-8% higher than now.
This week is going to mark the low for the month because there is nothing fundamental to support the traders this week. With the revisions and negative earnings expectations people are going to sell off. Starting next week, with the earnings released and approaching of option expiry, that should give more support to the market level.
On the European side
- Greece reported failure to meet deficit requirement, the financial aid is postponed to a later date
- Dexia is slaughtered in the stock market due to Moody’s putting it under review concerning liquidity
- Eurozone PMI reported 48..5 in September, slightly above consensus of 48.4, only Germany is above the 50 mark.
Europe is definitely the focus today, and set the mood. Possible failure of Greece and another major bank Dexia suggest too much uncertainties there. The markets still expect Greece to get the next trench of aid from the IMF, but now there is more doubts. The risk is too large for governments and the IMF to take that chance at this time.
The bottom line
Nobody wants to hold long positions overnight until there is a definite answer for Greece. Because people realize how expensive this problem is, and the current solutions are all band-aids until the next quarter. We believe that the gains are capped in Europe at 7-10% higher than today’s close and it will be a sell off opportunity due to the austerity measures and a global slow down. But if Greece doesn’t get the aid, the sell off could be more severe and it is hard to tell where the floor will be. Given that the policy makers know this, we are sure that they will buy time by giving Greece the bailout.
We are also waiting for ECB to come out with new monetary policy on Thursday. And given the inflation numbers came out last week, people are not expecting the ECB to be as aggressive as the market want. Based on the opinions of the ECB board members, we do not expect much monetary stimulus, unless accompanied by fiscal disciplinary measures
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