Market Comment - September 27

(Marco Bonelli) So what...?

The U.S. economy has been and is weaker than expected! Q2 GDP saw unusually large revisions to the downside and durable goods orders for July and August were quite disastrous (even the positive 1.1% non-defense, ex air sub-component was only driven by a jump in electric equipment orders, a measure that fell in the prior three months). Alright, let's write off Q2 and Q3 (which is almost over anyway!) but isn't a (suspicious) drop in weekly jobless claims and increased hopes for more aggressive stimulus measures in China the real forward-looking data, investors should focus on?


$58 Billion injection into the financial system by the PBOC and speculation that the China Securities Regulatory Commission (CSRC) would announce market-boosting measure (doesn't that sound like free markets at its best?) and the Shanghai Composite Index bouncing off 3 ½ year lows (with the chance of a double bottom and 2.2% away from breaking the 5-month downtrend) clearly brings the "Chinese put" to the fore-front. In other words, hopes for a recovery of the Chinese economy probably outweigh another confirmation that the domestic economy pretty much stagnates (sorry, grows at a moderate pace)!

And by the way, investors shouldn't rule out the "Bernanke put"! "Markets are realizing there is no longer a Bernanke put" was one of the arguments to explain the recent pull-back (along with other more precise questions like "Is the magic of QEternity over?" or simply "Is the rally over?"). As Ben Bernanke obviously defined his mission as pumping up stock prices, no matter what, he could easily increase the rather average amount of $40 Billion/month QE to much more aggressive levels (QE1 got bumped up to $100 Billion per month!) if he feels that weak economic data will depress stocks too much and a two or three percent pull-back in five consecutive down-days for the stock market is taking too much out of the infamous wealth effect!

This week's market action comfortably falls into the consolidation category as window-dressing ahead of the end of the month and quarter and positioning ahead of the (once again) most important earning season in combination with probably some sell-the-news activity after the announcement of QE3 two weeks ago. The critical level to watch continues to be 1422 in the SPX, which was the March/April 2012 high where the index broke out on September 6. Corresponding levels in the Dow at 13338, in the Nasdaq Composite at 3134 and NDX at 2794 and in the Russell 2000 at 848 (levels that apparently got slightly broken yesterday) are certainly important but the SPX level is what market players watch the most.

Luckily, commodities react favorably to the renewed growth hopes for China (and even the beaten down crude price finally recovers that clearly shows that concerns about weak demand and too large inventories was clearly overdone!). That said, fundamentals still don't matter too much and bad data gets offset by stimulus talk on the other end. On a plain level field concerning fundamentals, sentiment could easily determine the short-term market direction over the next few weeks - and the current (consensus) cautious and nervous sentiment gets confirmed and grows with each weaker day! Buy the dips!

Trade well.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)