What The Market Thinks Now
A shortened week started out on a positive foot when
a report on manufacturing activity gave one of the first hints of the year
that the economic downturn brutalizing equity index futures may be
bottoming. But consistently negative reports on the state of the economy
through the remainder of the week has
roiled financial futures, and key markets are saying, “things are going to get
worse in the US economy before they get better.”
The reports following Monday’s bullish NAPM
“industrial activity” report said, in short, that productivity is
down, retail sales are flattening out, the service economy is still
spiraling lower, and unemployment is accelerating at an unexpectedly rapid
clip. While the markets thought the economy may have found a bottom after
Labor Day, they are ending the week saying there is still more bloodletting in
store.
And how do you tell what the market thinks? Look at
key markets’ price action. Debt futures rallied to contract highs as traders fled to their
perceived safe-haven, stock index futures undercut their April bottoms to
move to contract lows, overseas currencies gained as investors shed dollar
holdings, the telling fed funds futures contract surged to predict lower
interest rates than anyone has yet expected.
Look at the key
S&P 500 futures
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both weekly and intraday (closing) patterns that say they have more downside
to do. The contract closed down 20.00 at 1083.50, below the neckline of a
head-and-shoulders pattern traced in the final hours of trading Friday.
And notice the similarity in the weekly set up of the S&Ps. They too
closed below the neckline, or breakdown point, of their pattern. Using
traditional measured move analysis (see my article titled Defining
Reward/Risk Ratios With Chart Setups in the Futures/Education/Patterns
section on TM.com website for more on this subject), these contracts could
travel twice the distance from the heads to the necklines lower.
Dow futures
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Nasdaq 100 futures, with the DJU1 losing 245.0, or 2.49%, to 9575.0, the
biggest percentage loser of the trio on the session. Stock index futures
figured prominently on the
Implosion-5 List and intra-session highs have persistently been sold.
Today’s jobs report showed a four-year high in unemployment,
sparking a move into the perceived safety of interest rate futures. Both T-bonds
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and
10-year notes
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setups, erasing all of the losses they suffered on Tuesday when the
NAPM manufacturing report suggested the economy might be bottoming. Both contracts are
currently making good on reversals at their previous 20-day highs in
same-day Turtle Soup Setups (Monday sets up Turtle Soup Plus One sell patterns in both contracts).
The best indicator of likely fed actions, federal funds futures, surged
to contract highs. Where just after Labor Day they
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to expect only a 56% chance of another 25-basis-point cut by Halloween,
today they surged to reveal this market’s new paradigm that the Fed will go
even further, pricing in a for-sure .25% rate cut to 3.25% by trick-or treat
and even pricing in as high as a 60% chance of another 50-basis-point
move to 3% by then.
Persistent high demand for
unleaded gasoline
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shift production priorities to prepare for winter, drove oil and distillate
futures to the consolidation range that defines the front-month October
highs.
Refiners usually shift gears this time of
year to “crack” oil into the distillate heating oil, a primary
heating fuel source in the Northeast, and scale back gasoline production.
But strong demand for gasoline has continued beyond the traditional close of
the major driving season, Labor Day, and supplies of the EPA-mandated
reformulated grade of unleaded are in increasingly short supply in some
major metropolitan areas that require its use. An outage of a major reformulated
gasoline refiner near Chicago is in part responsible for the gasoline
shortage.
Tipping you off to the potential for a
nice move in the energies was October crude oil
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heating oil
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domination of the Momentum-5
List. When a sector takes over the Momentum-5 List, such as the energies did
last night, there is an increased likelihood that the entire group will
rally. All three contracts are making good on Off The Blocks
entries but could encounter resistance as they bump into overhead
congestion at their highs. Crude added .45 to 28.03 and distillate
futures added over 2% each.