“The circus is back in town and this week will be full of zombie talk not only here at home but from across the pond as well. The Fed zombies, White House zombies, and overseas zombies will play an important role in shaping the market’s direction over the next couple of weeks. Last Wednesday was an “outside day” on the charts and although the S&P continues to ride an 8-week win streak, there could be a rush to the elevators if support is tested again.
There have been a slew of breakdowns in individual stocks and while the indexes held up, last Wednesday and Thursday’s pullbacks were vicious and what we warn about when bull markets go wrong. The Fed said all the right things on Friday and soothed fears they might end “quantitative easing” sooner rather than later and it was game on. One Fed head said he expects the economy to grow by 3% in 2013 but that view is probably 1%, if not 2%, ahead of most expectations.
Bernanke will speak this week and he will need to back up some of the bullish comments made by his buddies. Big Ben can sway the markets and if he looks nervous or shaky it favors the bears. A confident and upbeat Bernanke would be a blessing for the bulls. The overwhelming positive Fed comments from last week should have led to new highs but it didn’t as Tuesday’s peaks were well out of reach.
Another zombie event that will weigh on Monday’s action are the results from Italy’s elections. There are four knuckleheads vying for control of the country and two of them are criminals. Literally. Mario Monti is the current voice for the Italians but he will need to win a majority of the vote to stay in house. If not, he will have to team up with the less of three evils and that could cause some major concerns over Italy’s recovery and its dedication to the euro. Some of the other candidates want to cut the austerity measures that are currently in place and property taxes that would give any zombie a lift in the public polls. The results are expected on Monday and they will weigh on Wall Street.
Of course, the sequester cuts here at home are the main event but the sentiment isn’t as fearful as the “Fiscal Cliff” talks were. There are a lot of investors and Wall Street pros that seem to be shrugging off the March 1 deadline, and in the scheme of things, the $80 billion is insignificant as it is less than 2% of the deficit. However, if the zombies fail to reach an agreement we view it as more political gridlock that will impact the Defense industry and more jobs (and it will be a big deal).
President Obama was the one who agreed to the sequester cuts back in August 2011 and we remember how the market reacted up until there was an agreement. It tanked. The market also took a big dip in December on the Fiscal Cliff worries but rebounded strongly when the can was kicked into May at the beginning of the year. There could be a replay of a pullback and then a rebound on any positive news or actual cuts but buying any dips this week seems risky.
Our chart work for gold has been money over the past 6 months and last week we told you there could be a test to $1,550. Bingo.
Copper also took a hit and could be the story to watch going forward. The strength or weakness in Copper often gives an overall snapshot on the global economy and it too is breaking down. The metal has been in a solid multiyear uptrend but a close below $3.50 could have a nasty impact on the market.
Silver is below $30 and we are ready to buy more when and if it falls to $26. For those of you who have followed us for a few years know we like to buy Silver at these levels and we cannot stress that you should too. While silver is relatively easy to buy, we still believe the metal is undervalued and there is a shortage. The U.S. mint ran out of silver eagles in January and while they now have them in stock, the spot is still $2-$3 higher depending on when you buy. It still means you can get silver for under $30 an ounce but most people don’t realize there is a silver shortage and that it will be at $50 in 5 years.
We have been super bullish since December but last week we started to take a few short positions. For the Weekly Wrap, we sold some call options into strength and we exited a few positions after our Hard Stops were hit. With all of the indexes triggering our short to intermediate targets FROM DECEMBER, we said there seems to be more risk to the downside than the upside over the next few weeks. This doesn’t mean the market can’t go higher as we did get higher highs to start the week but we also saw lower lows and lower highs to end the week.” (from 2/24/2013 Weekly Wrap Update)…
The elevator came on Monday but it didn’t go all the way down for the bears as support held following an opening pop and drop of 3%. Much of the vicious pullback was blamed on Italy’s circus as their zombie elections yielded no clear “winner” but the bulls defended the 50-day MA’s (moving averages) and had Ben Bernanke as backup.
The Fed head said that there was no immediate end in sight for QE (quantitative easing) ending and that the system was working as planned. We will save the rhetoric of the money-pumping system keeping the market up and it worked magic again as the bulls recovered all of Monday’s losses by Thursday’s close.
Friday was a choppy day as our own zombies failed to reach an agreement on the sequester cuts but Wall Street shrugged off the bickering and shameless politics to end the week on a happy and up note. The Dow was able to reach new highs but the other indexes lagged, suggesting a top is in, and Monday’s have been bearish of late. However, the S&P 500 made a gain for the ninth-straight week and is still looking to challenge its 5-year highs along with the Dow.
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