The S&P 500 Index is Gripped by the "Uncertainty Malaise" and Contagious
Fri, Sep 3, 10:31 AM ET, by ForexTraders.com
As everyone waits for the all important non-farm payroll numbers to be released tomorrow morning at 8:30, there is time to take a breath and ruminate about why there is so much uncertainty in today's trading markets. The S&P 500 has been stuck in a ranging pattern for the past twelve months, and there is no immediate indication that its direction will dramatically change in either direction, either up or down. Pessimists and optimists state their respective cases, but the market index and the major currencies that correlate with it are at a loss to find a sustainable long-term trend. It is a bit like a prolonged U.S. Open tennis match over in Flushing Meadows. A fundamental data release pounds a hard serve that splits the forecourt. The crowds cheer, and the market swings up 50 points. But a smashing return from technical analysis subdues the optimism and blasts the market in the opposite direction. Each volley appears wonderful on its own merits, but this sideways match refuses to find an ending. Much has been said on the technical side that a large "Head and Shoulders" formation is dictating an impending 200-point fall in the S&P 500 Index. Surprisingly enough, there appears to be a similar pattern replicating itself in the "EUR/USD" currency pair. Are we to believe what we are seeing in the chart below, or is this just one more "false" signal? 
Other markets around the globe are also focused on the fluctuations of the S&P 500 as well. It is well known that many countries depend on the export trade to drive their domestic economies, and the relative value of their currencies versus the greenback tends to correlate quite mysteriously with the movements of our broader stock indexes. This rule is easy to understand when speaking about Australia or New Zealand, but for the past few months, the Euro has joined the dance. 
It looks like forex traders need to guess along with everyone else where the S&P 500 is really headed. Friday's payroll data may be the latest ephemeral market mover, but the time horizon for a major trend keeps moving forward like "hockey stick" business plan projections for early stage development companies. As soon as the market assimilates the BLS data, about 30 minutes past the 8:30 release, we are apt to witness a nice run for four hours of one currency at the expense of the other. Fortunes are to be made when trading on the news, but it is not for the faint of heart. Once the frenzy has died down a bit, the talk show pundits will proclaim that uncertainty remains because, after all, it is an election year. Consequently, the "right shoulder" in everyone's charts will continue to form over another three months. The latest rumor is that the administration is open to deferring the expiration of the Bush tax cuts for another year, but an act of Congress is required for this to take place. Many believe that a legislative gridlock, similar to what happened during President Clinton's presidency, may be the best thing for the economy in the long run. However, ironclad certainty on that prognostication will not arrive until early November. Investors are left to ponder where to put their capital. They have fled equities in droves and settled in bonds, but bonds are a ticking time bomb. The length of the "fuse" rests solely with Bernanke and the Fed. Any increase in rates will spell depreciation in bond values and another mass exodus to the next safe haven. The housing and banking sectors seem doomed since any recovery in their midst will be pounded down by higher costs of capital. Will risk-averse capital fly back to Gold? Current technicals signal an overbought condition at present, but technicals have never stopped a gold-bug from buying more of this precious metal. The Euro and Gold have tended to correlate rather well over the past decade, but they stopped being dance partners back at the turn of the decade when Gold abruptly chose the Dollar to dance with instead. This trend does not appear to be changing when one looks at the chart below: 
The line for Gold is almost "mirrored" in the Euro "blue lake" below the "0 %" shoreline. If the Euro does depreciate, then it bodes well for Gold, and vice-versa. Perhaps, there are no safe havens in this perfect storm that is brewing, but currencies always come in pairs, and one of them will always be appreciating. If employment data can move this market, then disposable income per capita will move it more. That statistic has been abysmal in our country for the past decade, flat-lining at zero to negative growth for the period. The destruction of our middle classes' buying power has been brought about by decades of outsourcing and offshoring of jobs in every economic sector. Corporations have been on cost-cutting binges to remain competitive. Their earnings reflect the success of these activities, but the resulting cash of $2 trillion remains frozen on their respective balance sheets, waiting for "certainty" to rise from the ashes of American consumers. In the meantime, the markets wait for no one. The NASDAQ just hit its 20 and 50-day average. The Dollar weighted index has traded flat for two weeks, mimicking the indecision of the S&P 500 index. Optimists are hopeful that a positive breakout will surely occur soon. Pessimists are expecting an imminent downdraft. However, the consensus view suggests that a breakout above the 1,120 level by the S&P 500 index, its 200-day moving average, will signal a positive trend that will last for more than a few hours or so. It may also dispel the disciples of technical pattern recognition and end the debate that a double-dip recession is on the way. Until then, polish up your crystal ball and buckle your seat belts. It just might be a bumpy ride.
SDI Glossary: "the Fed" Definition
SDI Glossary: "NASDAQ" Definition
This Article's Word Cloud:
Euro
Gold
about
another
appears
been
below
buying
capital
certainty
correlate
currencies
dance
data
decade
direction
down
everyone
from
have
index
just
like
major
market
markets
match
months
more
over
past
pattern
positive
signal
stopped
take
technical
that
their
then
there
this
time
trend
well
what
when
will
with
year
More articles: 1 2 3 4 5 6 next »
| 
RSS