Crying Wolf
Comment of the Day

October 09 2013

Commentary by Eoin Treacy

Crying Wolf

Eoin Treacy's view The one big takeaway from the Contrary Opinion Forum was that while in 2012 the majority were terrified by the prospect of the fiscal cliff, a government shutdown and thought a stock market crash was imminent; most commentators were bullish this year. Even though the government has shut down and there is no sign yet of a compromise, almost every presenter was complacent about the risk of a stock market pullback.

Over the last few years every time a political impasse over the debt ceiling has developed, there has been a last minute compromise that kicks the can down the road for another few months until the political drama starts again. It seems that while the media circus surrounding the event is as animated as ever, investors have become desensitised to the issue.

It is difficult to contemplate that politicians might be foolhardy enough to force a default. However, while the prospect is unlikely, we are forced to consider it. An additional consideration is that the Fed is unlikely to embark on tapering while the political impasse persists. The expectation of continued support from the central bank is probably one of the most relevant factors in the relatively mild reaction of markets to date. .

The S&P500 has pulled back to test the region of the progression of higher reaction lows and has closed the majority of its overextension relative to the 200-day MA. Therefore the current area represents the region of the first area of potential support. With just over a week to go before a decision will be forced on politicians the potential for a positive outcome to act as a catalyst for a rally is the most likely scenario. However, a clear upward dynamic will be required to confirm that view and in the meantime the yearlong progression of higher reaction lows will need to hold if the trend is to continue to be considered consistent. In the interests of openness, i still have a short postion in the S&P.

The Dow Jones Industrials Average has been mostly rangebound since May and has returned to test the region of the lower side of that congestion area and the 200-day MA. A clear upward dynamic is now required to confirm support in this area.

The Nasdaq-100 had been conspicuous for its relative strength but yesterday’s downward dynamic suggests a process of mean reversion has begun here also. The Russell 2000 has a similar pattern.

The $1.35 area has offered resistance for the Euro on a number of occasions over the last 18 months. Following its rally over the last few weeks, this market is also likely to be sensitive to a political catalyst.

Gold continues to hold in the region of the $1300 but requires a catalyst to reignite demand dominance. Interestingly, gold was barely mentioned at the Contrary Opinion Forum this year suggesting that participation has declined considerably over the last 12 months.

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