Up, Down, Sideways?

Good Morning, Friends. Lower Manhattan still resembles an armed camp in spots, but here we are, with a new day, a new market, and new opportunities.  Equities, and the Euro, are currently climbing higher. A prominent consulting firm observes that the FOMC may feel compelled to act more aggressively following its meeting next week due to weak readings from the U.S. economy.

That may well be the case; the problem, it seems to me, is that the Fed has few additional tools that are appropriate to the task of getting businesses to hire. The most widely discussed has been Operation Twist, in which the Fed uses funds from maturing shorter maturity bonds to buy much longer ones (ten years and out). This will, in an ideal world, reduce long term borrowing costs for both businesses and consumers, particularly those looking for mortgages.

Of course, as Bill Gross of PIMCO pointed out in a Financial Times editorial last week, banks aren’t normally thrilled to be borrowing short term money at nothing if they can only lend it longer term, in a very uncertain economic and regulatory environment, at slightly more than nothing. The talk has, however, helped convince investors, both U.S. and overseas, that longer term Treasury securities are a great port in the current storm.

In any case, stochastics on the SPX were so oversold that we were prepared for a bounce. Using the methodology taught by Todd, and using a slightly longer term chart (hourly), it appears that the SPX should run into resistance between 1175 and 1185, with a break of the latter suggesting a potential reversal.

As noted in the post below on “A Dollar, A Day”, this is one of the times when keeping an eye on the Dollar Index (DXY) may help provide an early warning signal for a renewal of the downtrend in equities; when the current correction ends, and the Index begins to move higher, stocks should start motoring lower in turn.

About the Author Brian Keith


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