Tuesday, November 3, 2009


Market Diary: What Happened Since Our Last Biweekly Review

Global Stock Markets

Because most major international stock indexes move with the S&P 500 Index, the chart below of the S&P 500 Index Futures Contracts gives us an overview of all major global stock indexes since our last Newsletter of 10/19.

Here's a chart of the S&P 500 Futures as of 10/19. At the time this image was made the market was climbing and would end the day closing at 1095, which would prove to be its very top close for the next two weeks.

The S&P 500 Futures 10/05—10/19

03 oct 19

Here's a chart of this bellwether index since then:

The S&P 500 Futures 10/19—11/02

Image: 04 Nov 02

As the chart above shows, the market began its pullback the very next day, erasing the gains of October 19th and beginning a 5.9% drop to a low of 1030 as of this writing.

This performance roughly reflects the direction and magnitude of losses across the spectrum of risk assets. Why the drop?

As we review our daily analyses from this period, the main reasons appear to have been:

• U.S. Q3 earnings reports showed stabilization but were not good enough to justify higher stock prices at this time. The signs have been there for those who willing to see them. For Q2, investors were satisfied that the threat of financial collapse appeared to have receded, and that companies managed to beat lowball earnings estimates even though businesses were clearly still getting worse. No longer. This time around, the media had been raising questions about whether companies could show actual growth of their sales and overall business that could justify the highest valuations the S&P has seen in years, despite the ongoing downturn. The doubts were more than legitimate. Historically, the average Price/Earnings ratio for the S&P is around 15-20. While the recovery is far from robust or even fully underway, the current figure is around an astounding 143. Yet all the fundamental problems in housing, banking and employment that caused the current downturn are still fully unresolved. Too many firms reported continued declines in revenues or profits based on unsustainable actions like cost cutting , asset sales, or accounting tricks.

• The balance of news over this period was the typical mixed bag that showed halting improvement but not enough to justify belief in further gains in risk assets. Meanwhile there was plenty of bad news to confirm that it was time to take some profits. Employment continues and housing continued to worsen, UK GDP showed continued contraction, and even the better than expected US GDP was discounted as the result of temporary government stimulus rather than genuine private sector recovery.

A Normal Retesting of Support or New Down Trend?

The big question is no longer whether the rally can continue—it can't, not until there are signs of further recovery. Instead, the focus is on whether the current pullback can stabilize soon as a normal pullback within a continuing uptrend, or whether we are beginning the next move down into a double dip "W" shaped recovery, or longer period of stagnation or decline.

The coming weeks will not give us the big picture, but are very likely to set the near term direction. This week is packed with central bank policy statements and employment figures, including the month's climactic US Non-Farms Payrolls and Employment rate figures for October.

Some Trading Opportunities Over the Past Two Weeks

Needless to say, this kind of volatility was trader's paradise, and much of it was in clear sustained directional moves or within identifiable ranges.

EUR/USD [200:1 leverage]

• Fell from 1.5041 to 1.4685, a move of 356 pips or 2.36%, in just 3 trading sessions from 10/26-10/28. Potential profit: 473%.

• On 10/29 rose over 1% on the positive US GDP surprise, then on 10/20 retraced the gain along with the rest of the markets for another 1%+ move on the way down, an over 2% round trip. Profit potential: over 400%.

The S&P 500 CFDs [100:1 leverage]

• Pulled back about 5.9% in 5 trading sessions from 10/22-28.Profit potential: almost a 600% in under a week.

• Within the past 2 weeks, it has also made no less than 5 moves of nearly 2% up or down over the past two weeks, each one potentially worth approximately 200% profit for those catching the entire move. Profit potential: nearly 1000% for the entire round trip.

Crude oil CFDs [100:1 leverage]

• Dropped over 5.5% in just 5 trading sessions from 10/23-10/28. Profit Potential: 550%.

• On 10/29 rose from $77-$80, 3.89%, following the positive US GDP surprise, then retraced the move back down with the rest of the markets, falling from $80-$77, a 3.75% decline, for a total round trip move of nearly 8%. Profit potential: nearly 800%.

Of course, few would be so lucky to catch even the majority of these moves, but even a very realistic fraction of these moves that one could expect to get using prudent risk management techniques would prove extremely rewarding.


In another two weeks we'll have seen the results of the above mentioned critical reports and events, and will know whether markets are just undergoing normal consolidation or making a deeper test of support

This is exactly why AVA FX strives to provide such a diverse range of trading instruments. While other markets are struggling, our clients can always find a bull market somewhere

Disclaimer and Disclosure: The opinions expressed do not necessarily reflect those of AVAFX. The author holds no positions in the above instruments.

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