April 18th, 2010

From Jaw Boning to Sledge Hammer

I was fairly sanguine about the course of the market over the near term but Friday’s events surrounding the SEC and Goldman Sachs was chilling. It reminded me of something I had written on January 22 entitled “Jawboning Didn’t Work in 1962; It Doesn’t Work Today“. It’s worth reading again.

For those who may have missed the piece, it dealt with apparent, at the time, similarities between Obama’s lashing out at banks and Wall Street, on the one hand, and J.F.K.’s attach on the steel industry in 1962. What was the price on the stock market of Kennedy’s confrontation with Steel, a sector that was a larger portion of the economy then than it is today? From the day of the news conference to June 26, the market suffered a mini-crash of 22.9% over the next two months (Obama’s tirade cost the market 8.13% in 14 trading days!).

On January 21, Obama said the following about “financial reform”: “We have to get this done. If these folks want a fight, it’s a fight I’m ready to have.” Friday’s announcement of a suit by the SEC against Goldman Sachs seems to be his dropping the jawbone and picking up a sledge hammer. Will this fight end with GS or will it spill out to mangle and mutilate the prospects of the whole industry? Will this and any future action against one of today’s largest industry undermine the nascent recovery in these stocks and, indirectly, the whole stock market?

But market participants seemed to have regained their footing after the initial adverse reaction to Obama’s speech. In addition to a 13.64% recovery move since the correction, trading volumes also seem to have picked up (click on image to enlarge):

Average volume of the stocks comprising the S&P 500 Index (as reported by Yahoo-Finance) reflected in the 50-DMA line turned up for the first time since September 2009 as the sales volumes increased every so slightly due to the panic aroused by the uncertainties of Financial Reform and the European sovereign debt crises, both occurring in February. On Balance Volume continued to trudge higher (light line) indicating that volume on up-days continue to surpass down-days – a promising prospect.

Will market participants again shy away from more commitments? Will all that supposed “money on the sidelines” stay there with already committed funds reverting back to cash positions? Will all this discussion concerning Financial Reform be the catalyst for a major correction that many have been waiting for? And will the coming mid-term elections (see “Mid-term Elections in 2010 and the Stock Market” of January 28) be the antidote that brings the market back to recovery? We won’t know for several weeks.

But I’m standing up the dominoes once again to see if the market is going to start knocking them down (click on image to enlarge):

The market dynamics still look strong even in the face of the damaging news on the political front:

  • The four moving averages indicating momentum are still trending up.
  • The index itself is still within an upward sloping channel within the major recovery move since last March 9.
  • The dashed red line was identified in February as the potential neckline of a reversal pattern; if a correction resulting from “banking reform” does materialize, that might still be the last line of defense. Interestingly, it converges with another bulwark for the bulls, the 200-day moving average.
  • Each of the moving averages and trendlines, if violated, represent another need for becoming increasingly more cautious and take more steps to liquidate some holdings and move, once again towards higher cash balances.

But lets not count any “black swans” until they hatch.

p.s. For those who follow this sort of thing, remember that the period to April 28 is supposed to be the bearish lunar phase.

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