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Yesterday, Reuters reported that the delinquency rate on credit card debt hit 6.6% in the first quarter of 2009. On mortgage loans, delinquencies hit 3.5%.
I can virtually guarantee both numbers were higher in the second quarter. And I expect them to move still higher in the future.
Unemployment will continue to rise. And even when it stops rising, it’s not going to magically reverse course, not when the U.S. economy is only growing 1% or 2% a year.
The recession we’re possibly on the verge of exiting has been unique. It wasn’t a consumer-led recession. Rather, it was a fundamental recession brought on by weakness in the very foundations of the U.S. economy.
You don’t wake up from this with just a hangover. You wake up without your car because you just wrecked it and your driver’s license has been suspended and you now have to take a bus wherever you want to go.
*****That’s why the IMF and the G-8 is now calling for more stimulus packages and funds. The G-8 is meeting in Italy. The U.S. appears to be in "wait and see" mode, despite some calls for more stimulus programs. And rightfully so. The U.S. done a lot, maybe more than it should, to throw money into the system. It’s time for some others to step up and do what they can do.
At the same time the G-8 is talking stimulus, it’s also talking about how to reign in stimulative monetary policy. This undoubtedly a good thing. We’re all well aware that if rates don’t rise, and liquidity gets sopped up, then inflation could run rampant.
Of course, inflation is not much of a threat now. But once the global economy starts growing again, central banks will have to respond with higher rates, even though growth won’t be robust. (If you’re interested in loading up on the stocks that will outperform once inflation hits click here for my Inflation Busters report.)
*****This is a very interesting time for investors. It’s going to be critical to be in the right stocks, and in the right sectors. Equally important will be avoiding sectors that are facing significant headwinds. Financials still seem to be among the most vulnerable sectors, while technology and healthcare are demonstrating a lot of promise.
Investing in this new economic paradigm (which I haven’t come up with a name for yet) is going to be a common theme for us here in the Daily Profit.
Investing in this new economic paradigm (which I haven’t come up with a name for yet) is going to be a common theme for us here in the Daily Profit.
It’s NewsletterAdvisors.com Wednesday and this week we’re treated to the expertise of Todd Salamone, Senior Vice President of Research for Schaeffer’s Investment Research. Instead of the usual question and answer format I’ve asked Todd to share with us the insights he provides subscribers to his Monday Morning Outlook service. Please enjoy Todd’s analysis and advice for traders this week.
What the Trader Is Expecting in the Coming Week: Wall Street Takes a Trip on the Kiddy Coaster
By Todd Salamone, Senior Vice President of Research
By Todd Salamone, Senior Vice President of Research
It is the same old story. The S&P 500 Index (SPX) has been locked in a brutal trading range since May 4 — the day it broke out above the round-number 900 level. During this time period, whether you are long the market or short the market, you are probably not making money unless you are operating in extremely short trading periods.
With volatility eroding as the market digests the gains made during its March-April run, premium sellers in the options market have beamed with joy since early May. The SPX’s action in 2009 reminds me of a couple of roller coaster rides at Kings Island, a theme park near Cincinnati, Ohio. There is The Beast, a wooden roller-coaster with huge hills that reaches great speeds, generates lots of excitement, and ends where it began. Then there is a coaster that I still remember as The Beastie, though the ride took on a new name in 2006, and is now called the Fairly Odd Coaster. The Beastie, a junior wooden roller coaster for the younger kids, has smaller hills, slower speeds, and much less excitement for the thrill seekers.
The January through April price action for the SPX was akin to a ride on The Beast: fast moving, big peaks and valleys, exciting, but an endpoint that was the same as the starting point. However, the current market activity is analogous to a ride on The Beastie: smaller peaks and valleys, slower moving, and less exciting, but also with endpoints and starting points identical.
As we enter the first full week of trading in the third quarter, support and resistance levels are a holdover from last week. That is, the 890 area is where buyers might emerge, with the declining SPX 200-day moving average now sitting at 887.94 while last month’s low was 893.04. Resistance lies in the 930 area, site of last week’s highs. The January 2009 high of 943.85 is an area that stopped the May rally dead in its tracks, and would be another area of resistance should 930 give way.
As the narrow trading range continues, the SPX’s 20-day historical volatility briefly dipped below 20 last week. However, this reading moved back above 20 within the blink of an eye following Thursday’s employment news. We continue to monitor this development closely, as the current level of historical (actual) volatility corresponds with similar readings heading into the market mayhem in September 2008. Is this the calm before a storm, or a continuation of the mean-reverting decline from historically high, longer-term volatility levels? Stay tuned, as we’ll soon find out in the days ahead.
Should actual volatility remain at subdued levels, we’d expect the CBOE Market Volatility Index (VIX) to continue its descent, as the VIX continues to trade significantly higher than actual volatility. The VIX did hit a low of 25.00 last week, but popped significantly higher on Thursday. The 25 strike could be supportive in the days ahead, as this strike is the home of peak put open interest in the July series. Unlike equity options, VIX options expire Wednesday, July 22.
Numerous economic reports last week did nothing to help lift the market out of its trading range. The employment number did spark selling on Thursday, with the SPX closing just below the 900 level. With the employment number missing expectations, this reminded me of a question posed in the June 20 edition of Monday Morning Outlook. At the time, I mentioned that we had seen an article from Reuters stating that a net 7% of investors believed a global recession is likely in the next year, compared with a net 70% just two months prior. After seeing this surge in optimism, I posed the following question: “Are the days of stocks reacting strongly to bad economic data numbered?” Thursday’s price action in response to a poor employment report may have very well answered this question. This question may also apply to corporate earnings season, which lies just around the corner.
With many of the short-term sentiment indicators that we follow near neither pessimistic nor optimistic extremes, and evidence mounting that institutional players are no longer in major accumulation mode while being hedged for downside moves, it appears that the market will trade on technical drivers for the time being. Therefore, investors may have to wait for the height of earnings season, which arrives during the last week of July, as a potential catalyst for the next major directional move. Earnings season officially begins this week, with Alcoa’s (AA) earnings report due out Wednesday after the close. But AA is about the only major company due to report.
My advice from last week remains the same. If you are an option buyer, consider some premium-selling strategies in case the trading range behavior continues, which I suspect it might for the next couple of weeks. A premium-selling strategy is a nice hedge to any longer-term option buying exposure you might have. There are certain stocks in the technology area that we like, and you can hedge your long technology exposure with short positions in the energy area. We continue to think the risk-reward scenario for the bond market and the U.S. dollar shapes up nicely for bond and dollar bulls. In the meantime, have fun on riding Wall Street’s version of The Beastie.
For a limited-time only, Todd Salamone is offering Daily Profit readers a free 90-day subscription to Schaeffer’s Daily Bulletin. Schaeffer’s Daily Bulletin is released every trading day before the market opens and provides traders with Bernie Schaeffer’s outlook on the market, a daily list of bull and bear stock ideas and commentary on a Featured Stock of the Day. Valued at $150, this 90-day subscription is yours free. Begin your Free Schaeffer’s Daily Bulletin subscription today! Click here to get started.