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Where are financial markets headed??


Are you wondering where financial markets are headed?  Don’t count on the WSJ to tell you.  The article below is from WSJ Marketbeat Aug 2.  The chart was re-printed on the front page of Money & Investing Aug 8.  If there is one conclusion from the past 50 years of financial econometric research, it’s that technical analysis is about as useful as palm reading or astrology.  (My apologies to those of you who believe in those prognostication tools.)  The market is mostly driven by economic fundamentals (and, of course, emotions).  My advice; just stick to washing your hair with Head & Shoulders.

 

It has also been statistically demonstrated that rating agencies such as S&P change their ratings based on the direction of interest rates, not the other way around.  In other words, you can successfully predict a change in S&P ratings by watching interest rates.  The market drives ratings; ratings do not drive the market.  The (minor) S&P downgrade in US Treasuries is a (belated) reaction to current market realities.

 

WSJ astrology lesson

Tuesday, August 09, 2011

8:22 AM

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August 2, 2011, 11:22 AM ET

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Has the Market Already Peaked?

 

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FactSet

This may well be one of those posts/articles that rings the bell at a near-term market bottom. But it’s worth asking, in light of recent developments: Has the market already put in a top?

 

First, there’s the S&P 500 chart, which looks awful right now. The index has drilled right through its 200-day moving average, which in the recent past has proven a resistance point. No longer.

 

What’s more, the S&P chart, if you blur your eyes and look at it the right way, has appeared to form a dreaded head-and-shoulders pattern. The market peaked in February, put in a higher peak in April, then faltered at a lower peak in early July. (Update: The eagle-eyed Paul Vigna first warned us about this here a month ago.)

Such a pattern can mean the market is about to start moving emphatically in a different direction, though that’s not a given. Head-and-shoulders patterns have appeared to form in this bull market before.

 

The S&P is still above the “neckline” of its head-and-shoulders pattern, which is about 1250. But it’s moving there really quickly. Breaking through that level might confirm a new, downward trend is in place.

 

But forget the chartism for a minute and focus on the fundamentals. The US economy, already less than hale and hearty, is suddenly staggering under the weight of a series of recent blows. The Fed is in no hurry to provide extra support, and Congress sure as heck isn’t. Europe’s debt crisis, meanwhile, rages unabated. Any further slowdown elsewhere in the world could pose a serious threat to teflon-coated corporate profits in the S&P 500.

 

Barry Ritholtz, who has been fairly optimistic about the market for a while now, today ratcheted up his estimation of the chance of a recession and wondered aloud if the market had topped out:

Prior to current action, I was more inclined to see the glass as half full. But here we are, a mere 5% from recent highs, and my probability is starting to shift. Whereas I was 70/30 consolidation versus topping, that assessment is now closer to 60/40 — and gaining speed.

 

Josh Brown at Reformed Broker, in a post that contains 100% more Michelle Rodriguez and Mila Kunis than Barry’s, wrote that he was leaving the market party a little early:

Will the aging cyclical bull market climb yet another Wall of Worry even as economic data worsens and internals weaken? Will Mila Kunis and Michelle Rodriguez kick the door down at the party and demand a couch they can make out on? I suppose these things are possible. But a lot of things are possible, I can only go by what the data says is more probable.

 

It’s early yet, but maybe not too early to start thinking about the prospect that the bull market, which began in March 2009, is over.

 

Pasted from <http://blogs.wsj.com/marketbeat/2011/08/02/has-the-market-already-peaked/tab/print/>

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