Market Summary

I was surprised after my last post that the market rallied instead of crashed as I thought it would. Last week however appears to have been a retracement rather than a rally as the market went up before it continues on its way down. The S&P 500 has been in a sideways channel for the past 6 weeks in what appears to be a 4th wave and a bear flag. While some markets did appear to put in a 5th wave bottom, for example, the financial sector index XLF on August 23rd, the S&P 500 did not put in a lower low than the 3rd wave and so did not technically put in a 5th wave bottom. While it is possible that the market could rally up from here it would have to be news or event driven to give the market a lift and I believe the higher likelihood is that the market will fail here and go lower. All eyes will be on Greece whose two-year notes rose for the first week in two months last week. The yield had climbed above 80 percent on September 14th but has currently come back to 54 percent. As the risk of default increases so does the costs to borrow money.

The current situation feels somewhat similar to the 2008 crash in the market following the Lehman Brothers bankruptcy. In keeping open to other points of view I read a very interesting article by Prof. Mark Blythe titled How to Turn a Continent into A Subprime CDO which I hope you find insightful.

The chart below shows the open after the weekend of the Euro / US Dollar showing how the Euro has fallen after retracing partially back up last week from its previous move down. The Euro appears to be headed towards the 1.30 area and could go much lower. When the Euro falls the US Dollar rises which puts downward pressure on the stock market. This week the Fed will hold a two-day meeting to discuss monetary policy and interest rates and lets hope they are able to help the market from falling off a cliff. Click on chart to enlarge.