A weaker than forecast GDP reading of 2% vs the 2.5% previous estimate, heightening yields in the EU – most notably in Belgium – and what Ben Bernanke characterized as “frustratingly slow” economic growth in the most recent Fed minutes pushed the major indexes into the red for the 5th time in as many sessions. As noted this morning though, alot of this poor news looks to have been getting factored in over the recent 7% decline, as the bears seemed to be using today’s weakness as an opportunity to cover shorts.
Still though, a lower low was put in place today as SPX traded below yesterday’s 1,183 low to 1,181. We’re going to call our new key support on the index 1,180. We still favor the risk/reward scenario for the bulls given how minimal losses will be on new long positions initiated so close to a clearly identified stop loss. With that said though, our underlying belief of an overall downtrend remains apparent given how weak the markets have been now for the last 5 trading days.
Every time the market tries to claw back to break even, or god forbid rally, it is sold into. The markets seem to go up on low volume and go down on high volume which is exactly what you don’t want to see if you’re a bull. The low volume moves higher point to a lack of sellers, not an abundance of buyers. This is in contrast to the high volume moves lower which point to a lack of buyers, and an abundance of sellers. A simple case study in supply and demand leads one to conclude that this is exactly the type of volume pattern consistent with a downtrend.
Our newest concern is Belgium. This little country famous for its pale ales looks to be the newest victim of the bond sharks. The yield on Belgium’s 10 year bond has gone from yielding 4.2% on 10/26 to 5.09% as of today. That is an astounding move of 20% on a government security which is unearthly to even think about in the bond market. Then you consider the fact that as of 10/2 this bond was only yielding 3.63% and we’ve got a 40% move higher in the yield. This is shocking, government debt is NOT supposed to be so volatile.
What’s more, Belgium currently boasts a Aa1 government bond ratings, one notch below the top Aaa status. The bond markets are telling us that they don’t think Belgium is worthy of such a high rating and frankly we’re a bit concerned ourselves. This high rating leaves the door open for credit rating agencies like Moody’s and S&P to slash Belgium’s credit rating which will push their yields even higher.
What’s the worst thing about all of this? Mainstream media, at least to our knowledge, doesn’t seem to have picked up on the crisis unfolding in Belgium meaning it could have a field day with the “Now it’s Belgium’s turn” headlines and be the log on a bearish fire in a market with an ever weakening technical backdrop.
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