Matrix Markets: July 2011

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The Debt Ceiling Day of Reckoning is Tuesday, August 2, 2011

The ultimate issue is confidence in the full faith and credit of the United States of America

S&P 500 OVERVIEW

S&P 500 The S&P 500 closed the week at 1292.28 on Friday, July 29, 2011. The S&P 500, SPX, was down -3.92% for the week, is now down -2.15% for July, and is up a mere +2.75% for 2011. This was the largest weekly drop since the week ending July 2, 2010. For the past 3 weeks of earning season, the SPX is a down -3.83%. The negative USA fiscal and economic uncertainties have overcome the positive earnings reports as the USA debt ceiling, budget, and fiscal crisis cannot be resolved. SPX is up +91.02% since the March 9, 2009 market bottom which was 872 days ago. The SPX closing at 1363.61 on Friday, April 29, 2011 was a multi-year closing high, the highest close since the closing of 1404.05 on June 5, 2008. SPX is now -5.23% below that multi-year closing. That closing exceeded the June 6, 2008 closing of 1360.68. The current close is now below the closings of 1300.68 on August 28, 2008 and 1305.31 on August 11, 2008, which was a rally peak, just before the USA financial crisis and market crash.

Volatility VIX closed the week on Friday, July 29, 2011 at 25.25, up an alarm-bell ringing +44.12% for the week and the highest close since the brief spike in mid-March 17. VIX is up +58.31% for the past 3 weeks of earnings season as the USA debt ceiling, budget, and fiscal crisis cannot be resolved. The skyrocketing VIX rose well above the 20, 50, 100, and 200-day moving averages this past week. The now ascending 50d avg has regained the slightly ascending 100d average. The 100d avg crossed below the now slightly ascending 200d avg on November 11, 2010 - a Death Cross - but is about to regain and negate. The 50d avg has regained the 200d avg.

U.S. Dollar The U.S. Dollar Index closed the week on Friday, July 29, 2011 at 74.22, up +0.28% for the week. The U.S. Dollar is down -1.60% for the past 3 weeks of earnings season as the USA debt ceiling, budget, and fiscal crisis cannot be resolved. The USDX continues below the 20, 50, 100, and 200-day moving averages. The USDX continues in the lower end of a trading range that began in March 2011.

S&P 500 Macro View The SPX at 1292 has three key levels of support below. First is the 200-day average of 1285, which SPX began testing Friday, July 29 and will fall below early this next week if no debt ceiling agreement is reached. Second is the 1265 - 1289 consolidation area of June 6 -24, 2011. SPX began testing this on Friday, July 29 and will fall below early this next week if no debt ceiling agreement is reached. Third is the March 16, 2011 closing low of 1257. This area will be tested this next week and probably will fail if no debt ceiling agreement is reached. SPX dropped below the 1300 - 1305 key support area on Friday, July 19 on negative USA economic data and the debt ceiling deadlock. This area, 1300 - 1305, was the closing peak of the August 2008 rally, just before the Financial Crisis in September 2008. SPX is now well below the February 16, 2011 prior multi-year closing high of 1343, which the SPX failed to sustain a rally above 3 weeks ago. Next above is 1353, which is 100% of the March 9, 2009 market cyclical closing low of 676.53. Higher still is the April 29, 2011 multi-year closing high of 1363. SPX has dropped below the 20, 50, and 100-day averages and is testing the 200-day moving average.

Economic and Market News Information about the USA and Global economies plus the USA financial system are posted at Boom Doom Economy, Financial Controls, Baidu Planet, and Neo Solomon.

S&P 500 DAILY CHART

S&P 500 Daily Chart Below is the SPX daily chart since December 22, 2010 to illustrate recent price interactions with the current price.

Noteworthy Closing Prices

Current Close: 1292.28

2011 High: April 29 1363.61

2011 Low: March 16 1256.88

2010 High: December 29 1259.78

2010 Low: July 2 1022.58

YE December 31, 2010: 1257.64

YE December 31, 2009: 1115.10

Market Cyclical Low: March 9, 2009: 676.53

S&P 500 Chart Review

Intermediate Term Trend: slightly ascending 25d avg greater than descending 50d avg since 7-22-11; SPX is below both 25d and 50d avgs, tenuously bearish

Long Term Trend: SPX greater than 10 month ema = 1278.65 since September 2010, tested in June, bullish

Key Resistance: 1300-1305, 50d avg 1309, 100d avg 1317, 20d avg 1325, 1343, 1353, 1363

Key Support: 200d avg 1285, 1265-1289, 1257

Moving Averages: above 200d avg; below 20d, 50d, 100d, avgs

Uptrend Line: below since 7-28-11; line from 3-9-09 cyclical closing low of 676.53 up thru the 7-2-10 closing low of 1022.58

Downtrend Line: below since of 7-8-11, had been below since 4-29-11, line from 10-9-07 all-time closing high of 1565.15 down thru the 4-29-11 multi-year closing high of 1363.61

RSI 14 day = 39.60 is oversold, ascending

RSI 28 day = 52.34 is reasonable, descending

MACD (12,26,9) = -4.04, descending, lowest since 6-13-11 (-5.34); multi-year high 7-7-11 (+9.45)

S&P 500 SUMMARY

Conclusion The S&P 500 is watching and waiting on the USA debt ceiling deadlock. Piled on that was dismal and near-abysmal GDP reports on Friday plus other various negative economic news. Overall positive earnings reports have been overwhelmed by negative economic data plus European and USA sovereign debt and fiscal crises. The SPX has dropped -3.83% in the past 3 weeks of earnings season. The problem is that with earnings season winding down into August, the USA debt ceiling Day of Reckoning on August 2 could be devastating if a satisfactory bipartisan compromise is not reached. The EU Sovereign Debt Crisis also places downward pressure on the equity markets, even with the latest Greek debt solution. The current earnings season has provided some support for the S&P 500 for the short-term. Longer-term, all is contingent on oil prices, in our estimation, if a USA debt ceiling agreement is reached. Persistent high oil prices will ruin everything and a material decrease in federal spending will be the tipping point for a complete stalling of the USA economic expansion into a recession. The USA is in a fiscal and economic quandary that has been years in the making by both political parties, but a drastic cut in federal spending, as opposed to a phasing down, would be harmful to disastrous. The intermediate-term trend indicator is now tenuously bullish. The long-term trend continues bullish and has continued overall bullish since September 2010. We are continue bearish for August, continue neutral to slightly bearish intermediate-term (6 months), and continue bullish long-term (12 months).

Disclosure & Portfolio We have no position in SPX, SPY, or any other related ETF as of this posting. We will so note such positions at the time of a weekly posting, but not any short-term trades, such as intraday or intraweek trades, between the weekly postings. We have no long equity positions now, period. August 2, 2011 is the Day or Reckoning for a bipartisan resolution of the budget and debt ceiling. We do not believe a "satisfactory" compromise will be reached by August 2. By satisfactory, we mean what S&P means, a "credible, medium-term fiscal plan". We believe the USA credit rating, both short-term and long-term, is at high risk of being downgraded. To err on the side of caution, we have now exited all long equity positions to live to play another day...

THE BIG QUESTION What happens now? Up, Down, Sideways?

Global and USA Uncertainties

1) First and Ultimate Concern is now the debt ceiling deadline of Tuesday, August 2, the fiscal crises, the USA funded debt of $14+ trillion, and the heated political and social debate. Moody's stated July 29 the USA should keep AAA credit rating, with negative outlook, if bondholders continue to be paid. Moody's had already placed the USA on review for a possible downgrade and previously said it would downgrade the United States to the "Aa" range, still considered investment grade, if the debt ceiling and budget is not resolve satisfactorily. Moody's has warned the USA to resolve the debt ceiling political deadlock or a short-term negative outlook rating is imminent. Fitch has stated they will cut the U.S. ratings to "restricted default" after a few missed debt payments. Previously, Fitch has stated that the USA would be placed on "watch negative" if Congress did not raise the debt ceiling by August 2. In addition, if the USA misses the August 15 coupon payment, then Fitch would place the USA rating on "restricted default". S&P in April had previously placed the U.S. rating on negative outlook, which means a downgrade is likely in 12-18 months. At that time, S&P cut the USA to a long-term negative outlook for sovereign credit. Now S&P has placed the USA on CreditWatch Negative with a 50% chance of a credit rating downgrade in the next 90 days. In addition, if spending is actually cut by any material amount, this will negatively impact the weak USA economy (and already has), rightly or wrongly, regardless of political beliefs. August 2, 2011 is the Day of Reckoning and a bi-partisan resolution of this problem does not appear probable, in our opinion.

2) Second Concern since March has been high oil prices resulting from the Libyan revolution and other Arab uprisings (Arab Spring) creating actual and potential supply disruptions. U.S. crude (Light Crude NYME) and Brent crude closed the week down at $95.70 and $116.85, respectively. Oil prices continue below the highs of late April and early May, but are trending upwards and persistent higher oil prices have become a drag on USA and Global economic growth. Light Crude (NYME) has rallied above the intermediate-term lows reached in late June and increased 4 of the past 5 weeks.

3) Third Concern is the deteriorating USA economic data, recent dismal and near-abysmal GDP data, and the recent dismal employment report. This appears to be mostly the result of the first concern, persistent higher oil prices. However, the USA political upheaval regarding the debt ceiling, fiscal crisis, and massive USA debt is affecting the economy. Consumer confidence continues at historically low levels - Great Recession levels - and now is at the lowest since the dismal days of March 2009, the unemployment and underemployment rates continue high, the housing market is depressed, the financial system is still weak, and the recovery has slowed significantly. A double-dip recession is possible and is becoming probable. Continued inadequate (slow to very slow) economic growth continues as the most likely scenario.

4) Fourth Concern is the EU sovereign debt crisis, which waxes and wanes in its effect on equity and credit markets. This problem is chronic, systemic, and therefore a long-term issue. The sovereign debt and fiscal problems of Greece have been in the forefront and the current EU rescue proposal creates at least a technical default by Greece, reported 20% bondholder losses for banks. This will result in some insolvent banks to be bailed out. Regardless, the Greek government has approved yet more austerity measures to buy yet more time and to receive yet another bailout. Italy is next and Portugal, Ireland, Spain, and even Belgium are in the near background. In addition, the peripheral Euro Zone countries, Eastern Europe, are ongoing sovereign debt problems.

5) Fifth Concern, a medium-term and long-term uncertainty, is the growing demand by emerging national economies (e.g. BRIC) for commodities, including oil and food, which then increases prices for governments, businesses, and consumers worldwide. This is also dragging down USA and Global consumer sentiment.

6) Sixth Concern is the catastrophic earthquake and tsunami that hit Japan, the world's third largest national economy. The resulting nuclear radiation crisis and the negative economic impact of this ongoing crisis and global implications have affected Japan, China, USA, et. al. Japan is officially in a recession as of the quarter ended 3-31-11 with a negative GDP for 2 consecutive quarters. However, Japanese economic output is rebounding rapidly from the crisis.

USA and Global Economy Overall, the USA and Global economic growth peaked in February and March. Oil prices then spiked and uncertainties increased. The April, May, June, and now July economic data has been disappointing and indicates the expansion continues slowing significantly for the USA and to a lesser extent for the World. The extent of the negative impact of sustained higher oil prices and global turmoil is being shown in the economic data. The recent economic data is discouraging, some dismal, and even some near-abysmal. Robust expansion has down-shifted to slow, very slow, and even near-stalling in some cases. Up to a point there is remarkable resiliency in both the USA and Global economic expansion in absorbing higher oil prices and crises, but we are concerned that by the end of July the expansion could stall completely for the USA.

The Future

We have pulled out the Magic 8 Ball, which continues overall negative, to divine what lies ahead for the S&P 500. The bears, aka fear and pessimism, are in the driver's seat over the bulls, aka greed and optimism. The negative USA fiscal and economic uncertainties have overcome the positive earnings reports as the USA debt ceiling, budget, and fiscal crisis cannot be resolved. Corporate earnings season has provided support for the S&P 500 with overall positive and encouraging earnings reports. Downshifting USA and Global economic growth has also stalled the S&P 500 Post-Great Recession Rally. The USA and more EU sovereign debt and fiscal crises will probably push the S&P 500 down even more beginning this next week. A USA bipartisan, medium-term fiscal plan does not appear probable by August 2. An equity and bond market panic will probably ensue and this will force Congress to compromise.

USA 2011 Q4 2010 corporate earnings, USA economic growth, and global economic growth exceeded Q3 2010 and propelled the S&P 500 above the 1300 benchmark. February and March 2011 was about the peak of USA and Global economic growth. March 2011 brought rising oil prices plus the catastrophic tsunami to Japan. The U.S. Bureau of Economic Analysis Q1 2011 revised GDP estimate of +0.4% was near-abysmal. The Q2 2011 first "advance" estimate of +1.3% is dismal. The revisions of 2008, 2009, and 2010 GDP data revealed a slower recovery and worse Great Recession than previously reported. The Q3 2011 economic data to-date indicates the USA and Global economic expansion has slowed further in July and probably continue a very low levels in August and September. Therefore, we estimate the Q3 GDP at below +1.5%.

ABOUT THE S&P 500

The S&P 500 has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities, it is also an ideal proxy for the total market. S&P 500 is maintained by the S&P Index Committee, a team of Standard & Poor’s economists and index analysts, who meet on a regular basis. The goal of the Index Committee is to ensure that the S&P 500 remains a leading indicator of U.S. equities, reflecting the risk and return characteristics of the broader large cap universe on an on-going basis. The Index Committee also monitors constituent liquidity to ensure efficient portfolio trading while keeping index turnover to a minimum.