Sunday, June 5, 2011

Week in Review: The Power of Zero To Be Tested?

The S&P500 and Dow Jones Industrials suffered their worst weekly loss of the year, both down 2.3 percent.� The U.S. and European equity indices had bearish outside moves and all major global equity indices we track closed the week below their 50-day moving averages.�� Asia fared better only due to the fact they closed before the release of Friday?s weak employment data.� �Investors and traders have definitely sold in May and gone away in the S&P500, Dow Jones, and all three European equity indices, which have had negative closes for five weeks in a row.

On the positive side,� the Brazilian BOVESPA looks like it?s trying to put in a bottom and the Shanghai Composite was able to hold its January?s important closing low of 2677 after trading down to 2689 early in the week. ��We will be watching Asia closely at the open on Sunday night as their equity markets have a chance to react to Friday?s employment report.

Apple, the general of this bull market, closed up 1.79 percent on the week and could be a catalyst for a market bounce if Mr. Jobs surprises at the company?s worldwide developers conference this week.�� Many traders are short the stock going into the conference on the expectation nothing of significance will be announced.�� Shorting Apple?� Ouch!

U.S. Treasury bonds closed stronger, but were unable to take out Wednesday’s� highs even on the dismal employment data.�� The dollar closed down for the second straight week and we find it interesting that risk assets have been unable to rally on the weak dollar. ��Though it?s too early to tell, keep this on your radar as the weak dollar/risk on trade may be a changin?.

The power of zero (interest rates) as a risk-on market prop may be about to face its first serious test.�� The toxic brew, which would signal something more serious than a garden variety correction, would be the combination of a weaker dollar,� equity and bonds moving lower, crude oil and gold moving higher.�� Not yet a high probability event, in our opinion,� and let’s hope we don’t see it, but keep it on your McSwan list.�� A credible and sustainable long-term debt/fiscal program included in a Congressional debt ceiling deal would go a long way in easing the concerns of the ratings agencies and increase the confidence of foreign investors in their dollar holdings. � Further dithering will be costly.

Good luck this week!

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