THE DOT - if this turns orange or red be alert

Sunday, June 8, 2008

Fasten your seat belts - part 2

Technical picture confirmed negative through the close on Friday beneath the 1370 neckline. The breakout of the flag upside correction initiated the move but the SPX performance is driven by the financial components and BKX made as expected new lows. It closed below 70 if the market confirms that by another weekly close below 70 the market is in big trouble.
The price patterns indicate a target at 1310 for the SPX and a close below 1370 today confirms those targets a test of the lows has a chance of 30% now lets see how some indicators read on the way down.

The BKX monthly chart above shows we have a potential down to 60 (even lower) and I do not hesitate to say its more a matter of when not if to get there but it may be until 2009 that the erosion may take a higher gear. But you can see the massive pressure since even in monthly charts the Bollinger Bands are challenged all the way down.
XBD the broker related index has a target of 110
having closed at 162 on Friday we get an idea how much pain is ahead in the consolidation of balance sheets.

The investment banks have still to much leverage around 30 but cannot deleverage all at the same time since that is the making of a crash - so they are put under pressure by the authorities to increase their capital base (margin call effect) and thanks to rich sovereign funds they get the capital for now but therefore they are asking for a stable Dollar which puts the US in a dilemma since although they said officaly they support a strong dollar they always meant to have a weak one to have a competitive advantage and in order to reduce the trade deficit. That competitive advantage saved the earnings momentum for this quarter the bottom line gains were made by currency gains but at the same time they need to finance their huge deficit and in order to save the banks the FED lowered rates far below official inflation ( real one is higher) which is a challenge for investors from outside mainly Arabs, Chinese and Japanese to buy their bonds in exchange for their export gains they made with the USA and the Arabs were compensated with strong rising crude oil. With exploding inflation and a risk of global recession ( I add that the world is due for even a cyclical depression) the ball game may change dramatically. Globalization has reached its limits and the pendulum will swing back to protectionism and nationalism. This will cause a structural change of financial markets and the first stage will be lower stock markets to adjust for new circumstances. Markets still carry the unlimited growth premium but as we know everything plays in cycles in the universe, nature and economy and the ethics need to be adjusted as well since the benefits of stockmarkets do not work for regular stockholders interest.

This market will be volatile with a downside bias and towards next weeks fullmoon the downside pressure should increase.

Have a good week.

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