Waiting For Godot... Part II
The market is trying hard to rally off of the very solid GDP numbers (3.8% annualized rate growth vs. 3.6% expectations) that we had this morning. However, the rally seems half-hearted, almost as an afterthought following the bad trading pattern that we've had in the last week -- the market rallies and then proceeds to sell off from quite obvious technical resistance levels (1205-1207) overhead. As expected, this tug-of-war between the bulls and the bears has resulted in increased intraday volatility. However, in order for us to feel confident that we are not just wasting our time trying to trade this market, we do need a definite resolution about the possibility of a late 4Q rally.
I still think it will happen, though it might take longer than initially expected for the SPX to negotiate the 1205 resistance level. The collapse in the XLE (energy select ETF) and the SOX (the Philly semi-conductor index) hasn't helped at all. Other sectors haven't picked up the slack, though one would normally expect that there is a good reason why people are raising cash selling their YTD energy winners such as ExxonMobil, Chevron, etc. So far, the cash hasn't flowed back in the market to other sectors (for example, the retail, gaming, homebuilders and consumer discretionary sectors continue to look like death incarnate!), which makes me... yes, nervous and worried!! The silver lining of all this cloud of worries may be that no significant downside support levels have been broken yet (e.g. the 1160 SPX support) in the major indices, and investors might just be waiting for the early November Fed meeting to get out of the way, before they lean long on this market, going into 2005 year-end.
What is one to do? When there is no money to be made, the best action then, by definition, is not to lose any money. Either stay on the sidelines or buy some longer-term value names, which I have highlighted in previous postings. Crucially, in the absence of any other winning sector candidates, I think we would still need the energy sector to at least stabilize, before the market as a whole can proceed higher, the reason being that the U.S. consumer is definitely not going to be the one to pick up the slack over the holiday period (like he has done on many other occasions!) -- it is obvious [from the economic data] that he is actually cutting back on spending, not increasing it. I doubt as well that this is only a temporary phenomenon, considefing that the proverbial noose is tightening both from the credit side (interest rates are going higher) and from the cost side (energy prices are indeed significantly eating into take-home pay). It is tough to make the argument, at this point, that this situation would change next year. There is still a good chance that the Fed overshoots its "neutral" interest-rate target and the economy might actually plunge back into recession, which might affect the revenue side (real incomes from employment) of the equation. But hey, maybe I am just worrying too much, and Mr. Bernanke already has a solution in mind. We'll wait and see.
I still think it will happen, though it might take longer than initially expected for the SPX to negotiate the 1205 resistance level. The collapse in the XLE (energy select ETF) and the SOX (the Philly semi-conductor index) hasn't helped at all. Other sectors haven't picked up the slack, though one would normally expect that there is a good reason why people are raising cash selling their YTD energy winners such as ExxonMobil, Chevron, etc. So far, the cash hasn't flowed back in the market to other sectors (for example, the retail, gaming, homebuilders and consumer discretionary sectors continue to look like death incarnate!), which makes me... yes, nervous and worried!! The silver lining of all this cloud of worries may be that no significant downside support levels have been broken yet (e.g. the 1160 SPX support) in the major indices, and investors might just be waiting for the early November Fed meeting to get out of the way, before they lean long on this market, going into 2005 year-end.
What is one to do? When there is no money to be made, the best action then, by definition, is not to lose any money. Either stay on the sidelines or buy some longer-term value names, which I have highlighted in previous postings. Crucially, in the absence of any other winning sector candidates, I think we would still need the energy sector to at least stabilize, before the market as a whole can proceed higher, the reason being that the U.S. consumer is definitely not going to be the one to pick up the slack over the holiday period (like he has done on many other occasions!) -- it is obvious [from the economic data] that he is actually cutting back on spending, not increasing it. I doubt as well that this is only a temporary phenomenon, considefing that the proverbial noose is tightening both from the credit side (interest rates are going higher) and from the cost side (energy prices are indeed significantly eating into take-home pay). It is tough to make the argument, at this point, that this situation would change next year. There is still a good chance that the Fed overshoots its "neutral" interest-rate target and the economy might actually plunge back into recession, which might affect the revenue side (real incomes from employment) of the equation. But hey, maybe I am just worrying too much, and Mr. Bernanke already has a solution in mind. We'll wait and see.
posted by Ivan at 10/28/2005 11:09:00 AM
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