Market Commentary: Averages Sink Lower Over Emerging Market Concerns

Written by Gary

Midday Market Commentary For 01-27-2014

The averages keep on melting down, not what I expected on Friday. By noon there was a tad more selling than buying and I do expect the averages to return (someday) to test their previous highs BEFORE and serious correction.

The Emerging Market woes are dominating investors thoughts today and the bear is in charge.

It seems that the Emerging Market ‘Risks’ are escalating and increasing investors worries 10 fold.

China Trust “Bailout” To “Unidentified Buyer” Distorts Market As “Risks Are Snowballing”

In a 2-line statement, offering very few details, ICBC’s China Credit Trust Co. said it reached an agreement to restructure the CEG#1 that has been at the heart of the default concerns in recent weeks.

The agreement includes a potential investment in the 3 billion-yuan ($496 million) product but didn’t identify the source of funds, or confirm whether investors would get all of their money back.

The media is very excited about this entirely provisional statement and we note, as Bloomberg reports, investors in the trust product must authorize China Credit Trust to handle the transaction if they want to recoup their principal which will involve the sale of investors’ rights in the trust at face value (though no mention of accrued interest).

As BofAML notes, however, “the underlying problem is a corporate sector insolvency issue… there may be many more products threatening to default over time,” and while this ‘scare’ may have raised investors’ angst, S&P warns “a bailout of the trust product [leaves] Chinese authorities with a growing problem of moral hazard,” and they have missed an opportunity for “instilling market discipline.”

The technical’s are coming back into favor, but I would cast a wary eye.

Is a pullback ahead? Maybe if the S&P dips below 1,775

Whether or not last week’s sell-off was a correction or the correction, technical levels are increasingly important to watch now, says Michael O’Rourke, chief strategist at JonesTrading.

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The short term indicators are leaning towards the hold side at the midday, but I would advise caution in taking any position during this volatile transition period. There will be pressure to climb higher if only to test the previous Blue Chip highs, therefore I do not foresee the markets descending below the sideways channel they are currently in until AFTER those highs are tested. (NOTE: The sideways channel downside has been penetrated and that technical therory has to be thrown out the window, but will it go below the next support at (SP500) 1775? Below that and we are in a serious correction mode and all bets are off.

Got to watch out for these overnight negative World news announcements which are usually rumors and make sure you have stops in place if you are not in a position to monitor the markets.

The longer 6 month outlook still remains 40-60 sell until we can see what the effects are in this almost nothing start of the Fed’s ‘Taper’. By March investors should know how the taper is going to work out in relationship to the stability of the US financial markets and their ability to not to slide downward. For now, I am continuing to expect weak to negative markets for the foreseeable future.

The Best Stock Market Indicator Update says the market is untradable.

Here is the quandary some investors have now. They have bet on the QE program to bolster their profits and knowing full well they may see some eroding of profits over the next few months, so what should they do? Start reducing positions now, my choice, or let profits ride a bit longer? What I am afraid of is that if a serious ‘Black Swan’ pops up, the market decent would wipe out a lot of profits. This ‘house of cards’ the Fed has built is fragile and would not take a lot to tear it down.

I would also take chart and other technical indicators with a grain of salt for the time being and watch what the Fed does over the next 4 months. Removing 10 billion from the bond buying program each month isn’t going to do much in reducing the QE program in the beginning, but halving it in 4 months certainly will – IF – the Fed’s continues the taper program.

My instincts tell me that the Keynesian’s are going to be reluctant to stop their grand financial experiment and will want to taper the taper within the next several months – especially if the employment rate increases. Also, watch for QE5 when Obamacare starts drags the economy down into trouble in 2015.

Also, many pundits have stated that we may have seen the top – but I wouldn’t count it as long as the Fed continues to hand out ‘Market Viagra’, even if it has been reduced somewhat! I would like to see a blowout candle (shooting star) to verify a top along with heavy volume to signify a market top.

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The DOW at 12:15 is at 15818 down 60 or -0.38%.

The SP500 is at 1777 down 14 or -0.78%.

SPY is at 177.51 down 1.33 or -0.76%.

The $RUT is at 1142 down 21 or -1.84%.

NASDAQ is at 4062 down 66 or -1.60%.

NASDAQ 100 is at 3492 down 50 or -1.41%.

$VIX ‘Fear Index’ is at 18.61 up 0.47 or 3.14%. Bearish

The longer trend is up, the past months trend is sideways, the past 5 sessions have been negative and the current bias is negative.

How Oil Really Gets Priced

WTI oil is trading between 97.16 and 95.74 today. The session bias is sideways and mixed and is currently trading up at 95.86.

Brent Crude is trading between 106.90 and 108.08 today. The session bias is negative and is currently trading down at 106.97.

Gold fell from 1279.20 earlier to 1257.21 and is currently trading up at 1262.30.

Analysts forecast a corrosive year for copper prices

Dr. Copper is at 3.256 falling from 3.286 earlier.

The US dollar is trading between 80.64 and 80.39 and is currently trading up at 80.52, the bias is currently down, but sideways.

To contact me with questions, comments or constructive criticism is always encouraged and appreciated:

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Written by Gary