Ineptitude Leads to Big Changes

 | Aug 07, 2011 | 2:39 PM EDT  | Comments
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This past week was one for the record books, a decline of near biblical proportions Thursday with high volatility Friday that really gave everyone the chills.

Was this to be 2008 all over again?  I doubt it, but those wounds are still fresh and our accounts still reflect the pain. Should we be surprised about the recent carnage? No, not if we take a sensible look at the situation. If we choose to ignore the issues and kick the can down the road, then we are as blind as our lawmakers and deserve the eventual pain, which seems to be coming sooner rather than later.

Debt Problems and a Downgrade

The issues surrounding the mounting debt have been cause for concern for years. So, Friday evening S&P decided it was time to downgrade the credit rating for US Government securities. This may have some ripple effects, but if anyone is surprised they have been living under a rock for years. It appears the debt ceiling deal did not go far enough to address the long-term debt problem.  When given a chance to make a bold statement our politicians chose a different path.

This downgrade is the result of ineptitude. I don't know what will become of this as I'm sure it is not a positive in the short run. But perhaps this was enough of a wake-up call to cut up the credit card and put some serious debt reduction at work. In my mind this is a great day for America. The unlimited credit card has been officially cut (for now).  The message has been received loud and clear: no more reckless spending will be allowed or consequences will be felt. We are over the limit, time to start paying it down.

Where Do We Go From Here?

The markets have a funny way of performing. They are a discounting mechanism and reflect news far in advance. The recent activity probably indicates where our economy will be in six-to-eight months. You guessed it, most likely no growth or possibly a shallow recession.

 

S&P 500 Index -- Daily
Source: StockCharts.com

 

Are we in or even headed for a bear market? Too soon to tell, but a year ago it seemed we were destined for it. Volume has been massive, institutions are distributing stock. Stocks have tumbled fast and furiously over the past couple of weeks, but so have oil and other commodities, hitting lows not seen in months.

 

S&P 500 Index -- Weekly
Source: StockCharts.com

 

Gold and silver remain viable with the uncertain currency issues worldwide.   The technical damage inflicted on the charts is quite apparent and when we look at longer term trends they are on the brink of being reversed. Perhaps there will be a good-sized bounce coming but that may be an opportunity for sellers to come in. This will be a wild trading environment.

 

VIX -- Daily
Source: StockCharts.com

 

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