Weekly Chart Review-Risk Off

Joseph Gomez

Remember all I said about the S&P 500 forming an upward channel of higher lows and higher highs? Well, it was good while it lasted. This week turned into a brutal (wholesale liquidation) sell-off as the motto-”Risk Off!” -rang loud and clear. As Joe Calhoun has often said, there’s a difference between the economy and the market(s). Market valuations are based on imperfect information and individual assumptions. It’s that collective wisdom, interpretation and actions that is the basis for technical analysis and why it is part of our investment process.

This week’s sell-off was mainly attributed to a lack of loss recognition on the part of European banks and the ECB and a thorough read through the Fed’s policy statement was cause for greater fear, caution and apprehension as expressed by our Chief Economist, Dr. John Chapman.

As if things weren’t bad enough, the prospects of ‘Operation Twist’ will, in theory, only make matters worse for the Financial sector. In an effort to further reduce long-term interest rates, the Fed will take its existing portfolio of Treasuries and shift $400 bln out of short-term maturities and into longer-term ones.

Every risk asset was a source of funds this week. Equities, corporate bonds, and commodities all sold off in dramatic fashion. Silver dropped the most, 24% and oil dropped almost 10%. The flight to quality was evident in the 30-year U.S. treasury bond, up 4% and the U.S. dollar, up 3% for the week. Since commodities are priced in U.S. dollars this can prove to be a silver lining to the economy. Many recent studies have shown that consumers are spending up to 20% of their monthly household budgets on food and gas. So if this trend continues, it will provide strained consumers with a little relief.

On September 7th, I posted why Gold looked like it had reached an important inflection point. Gold is down almost 15% from it’s all-time high. This week’s price drop was the largest in thirty years for gold. At this point, gold could find some support at 1600 or slightly below that level. Also this week, I have included a chart which depicts how closely correlated the financial sector has become with the S&P 500 and an ETF which tracks world indexes. This week, for the first time, I heard that Apple (AAPL) was considered a safe-haven. I guess it’s correct, because the stock actually rose more than 2%.

Both II and AAII sentiment polls are still mostly bearish, which we view as a positive attribute.

While the risk(s) of another drop in the markets is(are) increasing, it should be noted that plenty of professional money managers are significantly lagging in performance. Sooner or later a major rush to catch up is to be expected and the rally will be an impressive one.

Have a pleasant and productive week.

Foreign stocks on NYSE.

The S&P 500 seems like it’s drawn to the 1050 level.

U.S. Treasury Yield Curve is flattening

Key Rates from Bloomberg.com

	CURRENT	1 MO PRIOR	3 MO PRIOR	6 MO PRIOR	1 YR PRIOR
Fed Funds Rate	0.10	0.12	0.10	0.15	0.20
Fed Reserve Target Rate	0.25	0.25	0.25	0.25	0.25
Prime Rate	3.25	3.25	3.25	3.25	3.25
US Unemployment Rate	9.10	9.10	9.10	8.90	9.60
1-Month Libor	0.24	0.22	0.19	0.25	0.26
3-Month Libor	0.36	0.31	0.25	0.31	0.29

Mortgage* (National Average)

provided by Bankrate.com

	CURRENT	1 MO PRIOR	3 MO PRIOR	6 MO PRIOR	1 YR PRIOR
30-Year Fixed	4.00	4.28	4.47	4.81	4.31
15-Year Fixed	3.30	3.45	3.64	4.01	3.79
5/1-Year ARM	2.93	3.07	2.98	3.41	3.31
1-Year ARM	2.96	2.96	3.16	3.02	3.18
30-Year Fixed Jumbo	4.74	4.88	4.97	5.38	5.32
15-Year Fixed Jumbo	4.12	4.30	4.32	4.65	4.73
5/1-Year ARM Jumbo	3.17	3.35	3.35	3.66	3.97