2010-08-03

Glass half full or half empty?

S&P 500

I believe S&P 500 is at some inflection point and I get two projections. 1350 and 850. Now that is most troublesome considering I was outright bearish for some time. It all depends upon how the breakout from current formation occurs. Many correlations appear to be breaking from recent past. For one, S&P 500 has shown tremendous strength even in the time of falling treasury yields – i.e. bonds and S&P have risen together. Also US dollar has started breaking down recently indicating a risk-on attitude amongst market participants. Commodities have taken off strongly lately indicating an inflationary expectation BUT the bonds markets are not pricing in that inflation. Something has to give and what would that be? If an upward breakout occurs, the impulse wave from March 2009 correction has high end projection of 1350 for S&P500. However if we are to believe that the corrective wave from March 2009 lows has completed at 1219 then the next stop for S&P 500 should be 850 or about before resuming next down leg eventually below March 2009 lows. I know this is a “no view” post but that is the position I am finding myself lately.



In case it is bulls on the move, the dollar should continue to fall further and possibly testing 76 or even 74 on Dollar Index. The bond market should show some sign of pause and start pricing in inflation. In the Goldilocks scenario where the growth is pursued simply by borrowing more, the bonds can remain at the elevated levels and causing S&P to rise to phoney heights. In this case Gold should react on upside strongly later on in the year.
If bears are on the move, the dollar should recover soon and volatility should start rising. The bonds markets should make a strong move up to price in deflation and commodities should take a tumble.
The jury is still out on which path is taken but so far we are at some cross roads.
Happy trading.
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