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Filed under: News Trading Perspective | 02/06/10 03:27pm UTC
mcarniol

The Correction Has Completed

On Tuesday, I said that we were seeing stocks decline even though many economic and corporate earnings reports had beaten expectations and that it wouldn’t be surprising to see price on the S&P 500 moving towards that 61.8 retracement level (at 1036) . I also said that unless last week’s reports turn out to be very disappointing, which I didn’t expect to see happen, the present correction would likely to max-out at 10% if it even got that far.

Well, the correction actually appears to have maxed-out at 9.2%, which was made about 2 hours and 15 minutes prior to Friday’s close. From that low, the S&P advanced nearly 2.1% to finish the day with a gain of 3.08 points or 0.29%. The DOW managed to close above the psychologically important 10,000 level.

What exactly does the S&P have to do with currency? A lot, actually, because the one correlation you can absolutely rely on is that when the market is risk-averse, as it was this week primarily due to the concern over a sovereign default from Greece, stocks and commodities are sold as the dollar advances against the better-yielding euro, pound A$ and K$ while the yen gains on all.

This is really the way, the one sure way, to make an absolute killing in the forex market. If you can spot these fundamental events somewhat ahead of the curve, you just buy the buck and hold on for dear life as the roller coaster goes over the edge and begins to gain momentum. Too bad they don’t happen every day.

Actually, the whole Greek thing is nothing new; since gaining independence in the 1830s, Greece has been in a state of default about 50% of the time. But it’s different now because Greece is a part of Europe and the European community sees itself very threatened by this. Other default risks (Portugal, Spain, Ireland) abound as well.

What’s likely to happen is the Grecian debt contracts will be altered by lowering interest rates and extending maturities, which technically is a form of default. But a solution will be found one way or the other and it appears as if the market is ready to accept this.

Have a look at the daily candle on the S&P and what you’ll see is a Pin Bar, which often times signals a bullish reversal especially when it appears after a steep, rapid decline like the one we’ve been seeing since January 19th. The low of this correction, or near it, could be tested again just to make sure, but the odds are that the market will not touch the lows made back in November and that the charts will therefore provide another strong signal of upward price movement-a higher low.

The implications for currency movements are that the dollar will now turn around and start giving back its recent gains, especially as it becomes clearer that Friday’s NFP report contained many kernels of positive signs.

A deeper look into the Household Survey section of the NFP showed that the civilian labor force grew by 111,000 in January while household employment surged by 541,000,which is why the headline unemployment rate and the alternative U-6 measure of unemployment both turned lower. The number of people working part-time either due to business conditions or because they could only find part-time work decreased by 631,000.

In the Establishment Survey section, total private jobs decreased by just 12,000. The Diffusion Index for total private jobs, which mimics the ISM number in that a reading over 50 indicates expansion, increased to 46.8 from December’s 41.3 and last January’s 19.7. Hours worked increased 0.2%, the equivalent of creating over 230,000 private-sector jobs. Manufacturing jobs grew by 11,000, the first increase since the recession began. Service-providing jobs gained 48,000 and there were 42,100 jobs created in the retail sector.

Throw in the year over year same-store sales at retail establishments (+3.0% vs. an expected 1.0% gain) and that the scorecard for corporate profits and revenue has been very strong, and you’ll see there’s plenty of ammunition available to propel the S&P to a new high.

3 Comments » RSS feed for comments on this post. | TrackBack URL
[1] Comment by Groovy — February 6, 2010 @ 11:17 pm

Matt,

So far everything you’ve said has been a self-fulfilling prophesy. I fully agree to your arguments. Time will tell how it all pans out.

[2] Comment by FXSport — February 7, 2010 @ 2:17 pm

Matt,

From reading your posts you really look to the news for certain momentum moving events to occur – like the bottom you called in March 2009 after listening to the Berneke interview.

With the recent confirmation hearing you had mentioned that a no would be another momentum event (he got confirmation so it is a mute point)

While reading your take on the monetary figures would lead one to believe in a sustained US recovery and increase in the S&P are you impling that the positive correlation between the S&P and EU will continue?

I mean if the US economy continues on the upward trajectory (albeit a slower 3% GDP) and the EU problems spread (Greece, Portugal, Spain, Ireland) wouldn’t it put upward pressure on the USD for rate increases while the EU would be pressured for rate cuts to help it’s floundering members?

[3] Comment by mcarniol — February 7, 2010 @ 2:23 pm

What I would say is that if a debt crisis of this magnitude does develop, we won’t have to worry about this correlation because stocks will go down no matter what US GDP is doing.

In that case, the dollar is sure to gain.

Greece is going to be issuing new debt, and finding buyers will obviously be critical. No matter what happens to that end, borrowing costs for Greece (and for Portugal, Spain and Ireland) are sure to rise.

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