More Pain on the Way?

 | Aug 22, 2011 | 1:00 PM EDT
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There is no sugar coating the market action last week, it was downright awful. What looked like a promising start turned into a disastrous finish with the Dow Jones Industrial Average finishing off 600 points in two days, the S&P 500 off a staggering 70 on Thursday and Friday. The gap down to end the week was a killer on the charts, any support levels were crushed. Speaking of support, in this time of highly charged emotions, we cannot honestly point to any areas of chart support. When the selling commences you just have to stay out of the way. It becomes an exercise of time and not price -- the two most valuable tenets of technical analysis. Thus, the technicals provide very little guidance but serve more as observance of the left side of the chart. Estimates are futile and wild guesses.


I suspect the markets are overreacting to a very weak economy. But, as with anything, we often find the cart is put before the horse. The media profiles the awful market action, which immediately puts people into a panic. Look, there is no arguing with the economic numbers, they are truly awful, and we saw a big dose of how bad things might be with the recent Philly Fed report, Empire State report and Michigan consumer sentiment numbers. There is no doubt in my mind that the 3% GDP estimates from the Federal Reserve for the second half are way off the mark -- in fact more than one brokerage house has taken its estimates down sharply; on Friday night, Goldman Sachs (GS) snuck in a GDP downgrade -- taking a page from Standard & Poor's -- by hitting the market before the weekend). The dependence on the Fed to stimulate demand via monetary policy just won't work this time as inflation expectations are elevated now far more than in 2010. A year ago it was .5%; today it is north of 2%, so not much room to inflate.


From a technical point of view charts are a mess. I have observed short-term and long-term charts, and they all seem to tell the same story: pain. But, you probably don't need me to tell you that. With summer nearing an end, the party may just be getting started. I guess we can hope buyers can come back in earnest, but hope is not a great strategy. Looking at the daily action it appeared the washout post-S&P downgrade put the downside in the rear-view mirror. That proved to be incorrect.  Once again, many are hopeful that Ben Bernanke will say something cheery about another quantitative easing program, perhaps bolder and bigger than before. Those hopes and dreams are likely to be dashed this time around unless there is some globally coordinated action. Europe? Unlikely to participate. We'll see if the other major nations can rally around to provide some help. At this point, I've gone from being optimistic to hopeful.




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