The Eye Of The Storm
As hurricane Irene tests our mettle in the northeast this weekend, the markets set their sites on the historically challenging month of September. Will Irene foreshadow a similar outcome - one of panic and anxiety, yet manageable hardships - or will the market get capsized by the swells emanating from across the Atlantic?
From a risk perspective, the equity markets are my most unsettling piece of the puzzle going forward. My queasiness with stocks comes from the peculiar impression of feeling a greater confidence in my expectations for certain currencies (euro weakness/dollar strength) and the commodity complex (weakness), and the extremely contentious situation being navigated in Europe (so gloomy it's variant to believe it will resolve cheerfully).
Based on what we currently know about the European debt crisis, it seems very likely that at some point in the near future a very large capital commitment will need to be constructed to appease the panicked credit markets. The devil will certainly be in the details of terms, timing and commitments, but by all accounts it will eventually be on the scale of our own undertakings with quantitative easing. To date, the Europeans have been reluctant to collectively embrace a bailout because of the regions political and growth asymmetries and various political conundrums - such as the one evident in Germany today (see Here).
With that said, I believe a resolution will come from the existential perspective that we are all swallowing each others crisis porridge because the act of nonfeasance is still overcome by the collective screams of the world assembly. We find ourselves still walking with the echos of 1998 (see Here) in the charts and the participants reflexes to contagion - except on the public side of the ledger where the commitments will likely need to be 500 times larger than the private LTCM bailout was at roughly 3.6 billion.
I believe it is logical to anticipate that the euro will follow a similar arc with the dollar during the active rounds of QE in which the currency is initially devalued. The question is at what point on the panic continuum will it be engaged and at what level in the equity markets. I believe the charts hold many of those clues and my best guesstimate is we bounce over the next several sessions to between 1230 to 1250 on the SPX before heading back down to around 1100 during the retest. It is likely at the secondary low that the European bazooka will be fired and market participants will reconstitute their appetite for risk.