Stock Market Analysis

Sunday, August 07, 2011

US Debt Downgrade... US Market In Uncharted Territory

The Dow halted its landslide last Friday with a 60 points rally on the much better than expected Jobs Report. Indeed, the jobs market seems to have improved more than analysts have expected and a better jobs market is the prerequisite to any economic recovery.

However, just when the market is ready to price in the better outlook, S&P500 has to cut US debt rating one notch down from AAA to AA+ after market close. Indeed, like some high profile analysts said, there cannot be a worse timing for such a debt rating cut. Just when investors were ready to celebrate on the jobs report and better economic outlook, the debt rating cut hit their heads like a mallet on a mole. In fact, index futures are pointing sharply lower already, and Monday is expected to be another massacre unless the White House come up with something quickly. There is no doubt it would already be a bloodbath in the Asian and European markets before US market open.

This debt rating cut is a historical event which has never happened before and investors usually have only one response to never-before events... RUN. Indeed, the US debt issue is a serious one that could hamper all efforts to rebuild its economy. So far, the Dow has broken every single reliable support and short term bottoming signal so we are in uncharted territory now, both on the technical and fundamental front. Not even during the 2008 bear market did we see such a strong and continuous beat down, not even during the 2008 financial crisis was US debt rating downgraded. As such, there is no reliable historical reference in the US market for such events occurring. A look at the debt downgrades in other countries seem to indicate stock market recovery shortly after such a downgrade but how much does the behavior in those market correlate with the much more complex stock market of the biggest economy of the world? I do not dare draw such linear relationship. In fact, the market is at a juncture where is it too deeply oversold to start going short and too much negativity to start going long. Yes, an extremely tricky market now and no doubt a market for speculators who will be greatly rewarded for their correct "predictions".

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