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Wednesday, August 1, 2012

Daily update 8/1

The market is backing off that upper trend line a little bit at a time.  Here is the daily SPX chart.

Price failed to stay above the 7/19 high, signifying a failed break out.  The negative crossovers on the breadth charts became more pronounced today.  We have two days in a row where the market sold off in the last 30 minutes.  That is not bullish action by any means.  Here is the SPY 130 minute chart.

SPY is getting down to the price channel lower trend line and the 18 SMA.  Will this area provide support or will we drop through the bottom again?  That may depend on what the ECB does tomorrow.  I believe Mr. Draghi did a good job of ratcheting up market expectations for some big ECB move.  However, from what I have read it seems he will not be able to deliver on the promises.  Unless they do something the market likes I would expect the entire rally from last Thursday and Friday to be wiped out.

Here is the daily chart of the VIX.

I mentioned in http://traderbob58.blogspot.com/2012/07/vix.html that the VIX could easily turn back up.  It has done so and is now back above its 6 and 18 SMAs.  With the VIX starting to move up and the breadth charts negative it will take some terrific news for this market to go up.  This looks like a setup for a much more serious decline then we have seen the last few weeks. 

You might want to watch this video of Barclay's Barry Knapp from Bloomberg TV today.  He was talking about cyclical versus defensive stock valuations.  This guy is usually pretty good.

He says that defensive stocks are relatively expensive and cyclical stocks relatively cheap and this often happens right before a recession.  Although he does not think that is what is happening now.  He gave no reason to support that conclusion.  The only other time this happened without going into recession was the late 50s.  That was because the FED was holding rates very low much like today.  The upshot is that the market is doing what it usually does at the start of a recession and so is the economic data.  Who do you believe?  The pundits on TV or the market and the real data.  I think there is a belief that low interest rates will prevent a recession.  However, we know from Japan's experience that is not true.  Why does this matter you might ask.  The average decline in stocks during recessions is something like 38%.  I think that is a pretty good reason for it to matter.

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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.