Short Takes

An op-ed appeared in the Wall Street Journal today stating that “central banks are designed to stand up when markets fail to function.” It seems as if the markets are functioning just fine shunning the debt of countries with runaway spending habits and eye-popping entitlements. Markets are not “failing to function” when they pass on investing in or lending to banks with no respect for risk management. Why would a government or bank need to worry about risk management when the central banks were designed to bail them out? Central banks print money, which ultimately reduces the purchasing power of ordinary citizens via rising prices for goods and services. Citizens are hit with an indirect money-printing induced tax while government and banking leaders continue to lead and cash fat bonus checks. What happened to no more bailouts?

Moving on the next “final” solution in Europe, the entire concept of a new fiscal union, budget constraints, and penalties addressing the pressing issues in is somewhat misguided. The problem was summed up by Michael Derks, chief strategist at FxPro in the Guardian:

On some level, this last debate is rendered superfluous because most eurozone members will not get anywhere near satisfying the fiscal rules for some considerable time and so the imposition of financial penalties in the interim would make their plight even more tenuous. Merkel is apparently in Paris on Monday to thrash this issue out with Sarkozy, just four days ahead of the next EU Summit but Merkel is extremely unlikely to relent. For Sarkozy, there are huge political hurdles to accepting Merkel’s vision. The outcome of Monday’s meeting will tell us a great deal about the single currency’s near-term future.

Markets want nothing less than the ECB to declare they are willing to either (a) cap rates, (b) cap rate spreads, (c) “do whatever it takes”, or (d) buy bonds in unlimited quantities. If that fails to materialize, the markets could drop far and fast. From the Guardian:

The changes, if agreed to by member nations, would impose real fiscal discipline over nations, with the goal of giving Brussels the power to prevent countries from falling into fiscal trouble.

The approach is a risky one. It asks countries to sacrifice national sovereignty in the name of economic stability, but in recent years citizens have signaled an unwillingness to forfeit more control to Brussels. But an even bigger problem is that it’s a long term approach to an urgent problem. If successful, it may prevent countries like Greece and Italy from amassing huge debt burdens in the future. But it won’t solve the continent’s current crisis.

European nations need huge loans, and they need them fast or they risk defaulting. With the debt conflagration now blazing across borders, Merkel and Sarkozy are essentially gazing off at the horizon as the world urges Europe to deploy its most powerful option: unleashing its central bank to act as a lender of last resort.

Germany has continued to show opposition to the Hank Paulson “bazooka” approach to problem solving. Again from the Guardian:

The problem: Germany is resolutely opposed to using the ECB in this way. Merkel, appeared to reiterate her objections today (12/2/11), stating that “The European crisis will not be solved in one fell swoop.”

The stakes could hardly be higher. Forget about tiny Greece, Portugal and Ireland. Italy, the zone’s third largest economy, owes $2.55 trillion. It will have to refinance a staggering $530 billion in 2012 alone, and investors have been demanding unsustainable rates, in excess of 7 percent. Meanwhile, France’s interest rates are rising, and ratings agencies are threatening its AAA status. Even Germany itself — the continent’s economic powerhouse — may not be immune from investor’s aversion, as a recent weak bond auction showed.

Altering Europe’s treaties won’t change this. Instead, fear is mounting that Europe’s debt crisis is raging out of control, and could ultimately cause the breakup of the currency union or worse.

The most surefire solution would be for the ECB to step in, expanding its balance sheet to cover loans that private investors shun. That option would require a change in the bank’s charter, but it wouldn’t even demand taxpayer cash, given that the central bank can simply print money.

Even if the ECB relents and cranks up the printing presses, does anyone really believe creating money out of thin air to finance governments is sound policy? If money printing was the answer, we could all stop working and simply have the Fed and ECB hand out freshly printed greenbacks and euros. At some point, the markets are going to say enough with the money printing. Investors will simply leave markets and shun countries/currencies with a propensity to print. Printing money can “work” in the short-term, but history shows us it always ends badly.

Investors betting on a permanent fix in Europe may be very disappointed over the next six weeks. Forbes reported this week a major European bank was on the verge of failure before the Fed decided to…you guessed it…print more money. It was also widely reported this week EU leaders were told Italy was on the verge of insolvency. There are fundamental reasons the intermediate-term and longer-term charts continue to favor bearish outcomes. While it is almost comical, the U.S. Dollar (UUP) may attract “safe haven” capital in the intermediate-term. Put options, shorts (PSQ), and inverse ETFs (SH) may also come back into favor in a serious manner.

Could the Fed and ECB, armed with freshly printed dollars and euros, forestall the day of reckoning? Sure they could, but the fundamental clock continues to tick and investors are becoming more and more aware of the fragility of the global financial system. It seems the solution to all the world’s problems can be found at your friendly neighborhood central bank. Sounds too good to be true.

European Central Bank chief Mario Draghi gave the market some good news and some not so good news today. He hinted at more intervention by the ECB (bullish), but said their actions would be “limited” (bearish). From the Associated Press:

European Central Bank chief Mario Draghi hinted the bank is prepared to play a bigger, yet limited role in the resolution of Europe’s debt crisis - but only after the 17 countries that use the euro tether their economies more tightly.

“Other elements might follow, but the sequencing matters,” Draghi said. “And it is first and foremost important to get a commonly shared fiscal compact right.”

Draghi said such interventions “can only be limited” and said it was up to governments to first put their finances in order to convince bond markets that they are creditworthy borrowers.

Draghi’s cautionary comments tempered the euphoria that swept across financial markets Wednesday, when the ECB, the Federal Reserve and four other central banks unveiled a plan to make it cheaper for commercial banks to borrow dollars.

Two new developments surfaced on Sunday, which have pushed stock futures higher. According to the Wall Street Journal:

Asian stock markets rallied on Monday, while the euro climbed, on news on Sunday that the International Monetary Fund could lend a helping hand to Italy financially.

In addition to the Italy report, the euro also got a lift from news that euro-zone nations are mulling a new plan to speed up the integration of their fiscal policies. The plan, which was yet to be finalized, would give European authorities new powers to enforce fiscal discipline within the euro-zone countries.

As we mentioned on Friday:

A move back between 1,180 and 1,207 is well within reasonable bounds of the current short-term downtrend. The S&P 500 would have to close above 1,198 before making any progress in terms of reversing the bearish environment. The most likely area where a bounce higher would/will run into selling pressure comes in between 1,180 and 1,183.

If the reports on the possible IMF loan to Italy prove to be correct, it would be an important development since it could buy Italy some time relative to rolling over debt. The possible formation of a new European pact with financial oversight may also provide cover for the European Central Bank (ECB) to begin printing money to purchase European bonds.

Reuters’ summary of the two stories:

Germany and France are exploring radical ways to integrate euro zone countries in order to impose tighter budget control. In addition, media reports that the International Monetary Fund was preparing a rescue plan for Italy bolstered sentiment.

From Reuters (1:35 p.m. ET Sunday):

Barring an unforeseen breakthrough, the congressional “super committee” is expected to concede failure on Monday in its bid to reach a deal to cut the U.S. deficit by at least $1.2 trillion, senior congressional aides said on Sunday.

German Chancellor Angela Merkel put a damper on early stock gains in Europe as she hinted at significant policy changes that may spark more uncertainty in the weeks, months, and years ahead. From the Wall Street Journal:

In a one-hour speech at the two-day convention that is being held under the motto “For Europe, For Germany,” Ms. Merkel pounded the themes that have become a steady drumbeat in her daily messages back in Berlin about resolving the euro-zone debt crisis: that the euro crisis will take years of hard work to fix and that the crisis offers the opportunity to recreate the European project.

Recently, Ms. Merkel has begun framing the euro-zone debt crisis as her generation’s opportunity to take a huge step forward with the European project. In Leipzig, she touched on this theme again, saying Europe must have the courage to change the treaty underlying European monetary union treaty and allow tough, automatic sanctions for violations of the treaty.

Some angry delegates disagreed with Ms. Merkel’s willingness to shoulder the burdens of other European countries. Klaus-Peter Willsch, a member of parliament, accused the government of breaking a vow not to bail out Europe’s transgressors. “We promised Germans when we gave up the [Deutschmark] for the euro that we wouldn’t pay for the debts of other nations–no bailouts. This promise has been broken. We are doing exactly the opposite,” he said.

Ms. Merkel ruled out any introduction of so-called euro-zone bonds that would result in making the European community as a whole responsible for the debts of others.

The most important story as we head into the new week - from Bloomberg:

Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit. German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

We noted on Friday, the markets were showing some signs of a possible short-term reversal. The recent rally off the October 4 intraday low was strong, which means it may take a day or two before any bearish trends re-emerge. Buyers may still step in over the next day or so on pullbacks.

We looked at the markets from numerous angles on Sunday. The S&P 500 has three pockets or bands of resistance:

1. If we break 1,237, 1,250 becomes a logical level
2. If we break 1,250, 1,275 becomes a logical level
3. If we break 1,275, 1,320 becomes a logical level

The statements from Germany this morning decrease the odds of breaking of through 1,237 or 1,250. Any move higher may prove to be short-lived, but we will have to see how things play out. As shown in the chart below, the current rally in stocks has done little-to-no damage to the longer-term bearish case. If you took the dates off the chart below and asked anyone with experience in technical analysis, “Is this a bull market or bear market?”, they would not hesitate with the answer, “bear market”.

On October 11, we released the video below (bottom) explaining how a band of weekly moving averages, historically, has served as a bull/bear demarcation line. The chart below provides an update to the levels discussed in the video. As of Friday’s close, the S&P 500 remained below the upper band of moving averages, which aligns well with the ongoing profile of a bear market. The range of the weekly moving averages below is 1,201 to 1,240. A relatively short-term move above 1,240 would not negate the bearish case, but a prolonged stay above 1,240 would increase the odds of bullish outcomes. As we noted on Saturday, numerous challenges remain in Europe.

October 11 video: After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

If you are involved in the financial markets in any way, shape, form, or fashion, you know Europe is what matters right now. When the Financial Times caused a buying panic on October 4 after reporting European Union finance ministers are looking into ways to coordinate recapitalizations of financial institutions, it highlighted the market’s hope for a quick resolution to the European debt crisis. Before we review some common misconceptions about realistic timetables in Europe, our main themes are summarized in the excerpts below from an October 4 Bloomberg article:

German Chancellor Angela Merkel stiffened her resistance to joint euro-area bond sales, saying that investors yearning for a single gesture that can end Europe’s sovereign debt crisis now will be disappointed.

The euro area has to resolve “that the time of living above our means is over once and for all” and pursue debt reduction that will stretch over “many years,” Merkel said in a speech to members of her Christian Democratic Union late yesterday in Magdeburg, eastern Germany.

She said that issuance of shared debt by euro countries isn’t the solution to the problem spilling from Greece, even though some may long for the “big bang” to end the debt crisis. “Whoever believes that has no clue about the economy,” she said.

Financial markets are always looking ahead to the next milestone or “fix” in Europe. Below we explore what appear to be disconnects between what investors hope will happen and what is actually happening:

A euro area bank recapitalization program will be announced within days - right? Let’s go right to the source – below are some phrases and excerpts from the Financial Times article that caused such a bullish stir in the financial markets – as you read them ask yourself if a plan appears to be in place or if an announcement is imminent with specifics:

European Union finance ministers are examining ways…

Although the details of the plan are still under discussion…

“This should be regarded as an integral part…”

“It’s clear now that the European banking system needs to be strengthened…”

Finance ministers agreed on the need to act through national capitals while co-coordinating their approach.

A first step would likely be to ensure all countries have mechanisms in place..

There was “no formal” decision to begin a Europe-wide effort…

Finance ministers left open the exact means of how recapitalization would be coordinated.

One option being examined is to set new higher capital requirement for banks.

Think about that last line above – so, they mean the banks will be required to raise more capital?…In the public markets? In the words of John McEnroe, “You can’t be serious!”

In a recent CNBC interview, Nick Parsons of National Australia Bank hints that formal recapitalization of banks may not occur for some time.

“We can have an orderly default. Greek’s defaults on its debt, it does not leave the single currencies. So Greece remains very firmly within the eurozone. When European banks have to recognize the hit in terms of money lost on loans to Greece, then countries national governments in Germany, France and elsewhere will be forced to recapitalize their banks and they will be forced to create a much more stable rules based monetary union. But it’s not until Greece default that politicians will actually come together and put those measures in place. For the moment, they are in that awful position of just denying what the rest of the world sees both inevitable and obvious.”

An announcement concerning the use of leverage in the European Financial Stability Facility (EFSF) is just around the corner - right? The EFSF will be leveraged only if all countries sign off on it. From German newspaper Spiegel:

Even as the European Financial Stability Facility (EFSF) is now being boosted to increase its lending capacity to €440 billion, many say that won’t be enough and are calling for yet another expansion of the fund, though leaders in Berlin have firmly rejected such a course of action.

From the CNBC interview with Nick Parsons:

“No, I don’t think the EFSF will be leveraged because the German politicians, who last Thursday voted for the EFSF, voted for it on the basis that this was as it was discussed on the July 31 leaders meeting in Brussels. Many of the German politicians who went through the yes vote said, yes but no further and they made it very clear that they would be voting against further leverage. That leverage itself has got to be unanimous so I don’t think we will end up with a leveraged EFSF.”

Another perspective on leveraging from Germany’s Spiegel:

Indeed, European officials are already discussing ways to either boost the fund yet again or to leverage it, using the fund’s assets as collateral to borrow up to €2 trillion. On Tuesday, Belgian Finance Minister, at a euro-zone meeting of finance ministers in Luxembourg to discuss the crisis, said that the euro-zone is likely to pursue ways to boost the fund. That, though, is not a foregone conclusion. Germans in particular have been extremely wary of throwing additional billions at the debt crisis and a parliamentary vote last week to expand the EFSF to its current level already cost Chancellor Angela Merkel significant political capital. Several politicians from within her ruling coalition have said that further expansions are out of the question.

The markets hope the European Central Bank (ECB) will step up to the leverage plate. Reuters reported on October 3:

Jean-Claude Juncker, the chairman of the Eurogroup ministers, said the European Central Bank was not the main avenue being explored to increase the firepower of the European Financial Stability Facility, an acknowledgement that is likely to undermine confidence that the bailout fund can be sufficiently scaled up to calm febrile financial markets.

Other problems with leveraging the EFSF, as outlined by the Wall Street Journal, include:

The EFSF portfolio would be chock-full of undesirable bonds–precisely those that financial institutions didn’t want to buy in the first place–so it wouldn’t be the best collateral.

The scheme relies on the private sector to lend to the EFSF in times of trouble. But that’s precisely when the private sector is least likely to be lending.

It won’t come as cheap as ECB financing, or as cheap as the EFSF’s own triple-A bond market funding.

Banks would be wary about large commitments to a leveraged EFSF. The EFSF is an off-balance-sheet vehicle. Its creditors have no recourse beyond the guarantees that the euro-zone countries pledge to it.

The markets are stabilizing since action is being taken in Europe - right?: The Wall Street Journal reported on October 4:

The two-year swap spread, a closely watched gauge of credit-market risk, keeps blowing out and now trades at the widest level since June 2010.Growing worries about counterparty risks — especially involving banks exposed to Greek government bonds, such as Dexia — could spell more problems for eurozone banks, sending their funding costs even higher.

As conditions change and pressure mounts on policymakers, the markets may get some of their prayers answered. However, the current state of affairs points to more disappointments and delays from euroland. Consequently, we will still give the bear market the benefit of the doubt by sticking with bonds (TLT), the U.S. dollar (UUP), and S&P 500 shorts (SH). Bear markets often experience hope-and-rumor-induced rallies that share a common trait – they are retraced 100% on the next leg down. As we outlined on September 22, the S&P 500 will most likely see a close below 1050 sometime in the coming weeks. Could the markets rally sharply for a time and remain within the bounds of that probabilistic forecast? Sure - possible areas where sellers may become active again are shown below.

Just as Americans got a case of bailout fatigue, taxpayers in Germany are firmly opposed to any more bailouts or leveraging. Can you imagine if the U.S. government announced another bailout for Bank of America or Morgan Stanley? As noted by German Chancellor Merkel, Europe is faced with debt reduction that will stretch over “many years,” not a matter of days, weeks, or months. Danny John, of the Sydney Morning Herald, provided us with a tidy close on October 4:

For those optimistic investors hoping for a quick resolution to the debt crisis in Europe, which may bring some much-needed calm to financial markets, there is little doubt they are in for a long wait. We are not talking weeks here.

As we anticipated last week, an agreement has been reached in principal to end the debt-ceiling debate in Washington. The key points as we head into the new trading week:

1. The House vote is due to take place today.
2. The Senate may vote this evening.
3. The bill will most likely pass both chambers, but securing the votes in the House will be more difficult.
4. The compromise kicks the hard-decisions can down the road, leaving details of what programs would be cut to congressional committees.

The market’s initial reaction has been favorable. However, a more accurate read of the bill will come based on how stocks, bonds, and commodities behave over the next three to five days. In terms of our approach, it remains basically the same as it did last week. The longer-term outlook remains favorable, but we would like to see the technicals and fundamentals firm up over the coming weeks.

The deadline for some type of debt-ceiling deal is now only five calendar days away (three trading days). The odds of no agreement of any kind coming together remain relatively remote. The political stakes for all players involved, including both parties and the President, are too high.

If our elected representatives fail to reach an agreement over the next five calendar days, it will be a public relations nightmare for all of them. More importantly, it will be a nightmare for them on Election Day. There will be no political winners if they fail to compromise. Politicians may not be good at many things, but they tend to be very good at looking out for their own interests, especially when it comes to getting re-elected.

Those looking for a resolution on Friday will most likely be disappointed. Obviously, the situation is fluid, but based on our research, it would not be surprising to see a compromise surface in a manner something like this:

• Both of the current bills (House and Senate) will fail to pass both chambers in their present form (emphasis on present form).
• As the 11th hour shifts to the 12th hour, leaders from both parties will produce a bill that has a good chance of passing in both houses. The compromise bill will most likely begin to take shape between Saturday night and Monday night.
• As the pressure mounts and the clock ticks, it will be very difficult for individuals or parties to block the “solution” by voting no.
• A comprise bill will most likely pass both houses on Monday or Tuesday and be signed into law before Wednesday, August 3.

The difficult part relative to the markets is when will the compromise become public? Saturday, Sunday, Monday, or Tuesday? The odds are good the compromise will come to light when the markets are closed, which means the futures may price in the news leaving little opportunity to redeploy cash. If the Dow opens up 200 or 300 points on Monday or Tuesday morning, you cannot capture that gain with cash on a “gap open”.

The scenario above is one of many that may or may not play out over the next five calendar days. From a money management perspective, we must understand several possible outcomes and have plans for each. We are by no means locked into the scenario above, but we do have it as the highest probability outcome as of the close on Thursday.

The bigger questions for the markets may be:

1. What form will the compromise bill take?
2. What will the intermediate-term reaction be?

How we interpret the market’s reaction will be highly dependent on the bill that passes. If the bill is fairly substantial in terms of taking a first step toward meaningful reform, and the market cannot sustain gains past the initial relief rally, it will be a bad sign for the health of the current bull market. Once the next step is taken on the debt issues in our nation’s capital, the market will begin to focus on the economy, earnings, the Fed, and Europe.

Thursday’s trading session was not as bad as it looked. Volume on the NYSE dropped 7% relative to Wednesday. The NASDAQ saw volume contract by 12%, which indicates institutions were not running for the exits near the close. Market breadth was negative, but also showed an improvement over the previous trading session.

On the debt debate Bloomberg reported:

Senate leaders are working privately to reach a compromise that could clear Congress by Aug. 2, the date the Treasury Department says the nation will breach its borrowing limit and run out of options for avoiding default.

Reid and his Republican counterpart, Minority Leader Mitch McConnell of Kentucky, maintained a private dialogue on developing a path to a debt-limit increase in the Senate, where bipartisan support is needed to gain the 60 votes necessary to ensure a vote on controversial legislation.

The New York Times noted indirectly that they “get it” in Washington:

Leaders of both parties and in both chambers said that it was essential to avoid a default on the federal debt.

The current market looks weak, but not end-of-the-bull market weak yet. The next few weeks should give us a good indication if the second half of 2011 will bring higher highs or lower lows in asset prices. As we mentioned on July 27, our concerns about the market are related to how things evolve after the current crisis passes. We do not believe the markets will have a clear path to the finish line in 2011 even if we get a positive result over the next five days. We need to see improvement in both the fundamentals and technicals over the coming weeks. If we see improvement, we are happy to become a little more optimistic about the remainder of the year. For now, we are cautiously optimistic because the risk-reward profile of the market remains favorable (see tables at bottom of July 28 article).

After the market closed on July 27, we reviewed the latest news from Washington looking for information that can help us over the next six calendar days. Our current interpretation is that a deal will get done in some shape, form, or fashion.

A Bloomberg story noted that the credit markets are not overly concerned about the political banter in our nation’s capital:

Banks in the U.S. are scrutinizing credit-market movements as they look for distress ahead of next week’s deadline to raise the U.S. debt ceiling. So far, those metrics aren’t showing signs of panic.

“If the debt ceiling was such a problem, there’d be a lot more volatility in the credit markets,” said Leon Wagner, who co-founded GoldenTree Asset Management LP, a New York hedge fund focused on debt markets. “What we’re seeing is really just statistical bouncing around a normal trend line. That’s healthy in credit markets.”

Despite their public face of fighting with a singular focus for their constituents, important players in the debt saga are conceding that compromise is slowly coming into the process. From Reuters:

Senator Reid said he could easily modify his bill to incorporate elements of Boehner’s bill in a way that could win support from both parties in the Senate.

“There will be sufficient cooperation so a bill will pass that allows the debt limit to be lifted, with deficit reduction,” Democratic Senator Max Baucus said.

What about the concern that they are running out of time to get a bill passed by both chambers of Congress and signed by the President? The Associated Press reported:

Senator Reid was asked if there was a “drop-dead date” for a deal to pass the House, be amended by the Senate and reach President Barack Obama in time to avoid default.

“Magic things can happen here in Congress in a very short period of time under the right circumstances,” he said.

Amid all the heated rhetoric, it was easy to miss the fact that the differences between the sides actually seemed to be narrowing.

What happens if both bills fail to pass in both the Senate and House? The Wall Street Journal touched on this topic:

At the White House, officials anticipate that neither the Boehner nor Reid plans can get through both houses of Congress, and they are crafting alternatives that could be finalized over the weekend and put to a vote Monday or Tuesday.

We noted on July 27 that the impact of a debt downgrade may be less severe than many believe. The word on the street has been that Standard & Poor’s may downgrade U.S. debt even if one of the current bills becomes law. The Wall Street Journal reported that is not necessarily the current stance of Standard & Poor’s:

Deven Sharma, president of Standard & Poor’s, told a congressional committee the credit ratings agency does not think the United States will default on its debt. “Our analysts don’t believe they would,” he said.

Mr. Sharma said some of the proposed budget plans could help the U.S. bring debt and deficit levels within a range to maintain its AAA debt ratings.

Pressed by panel members on the prospects of a U.S. default, Mr. Sharma said a downgrade does not suggest a default is probable.

“If we change the ratings, it means that the risk levels have gone up, it doesn’t mean it’s going to default. If we believed that, they would change it to default status,” he said.

The New York Times had a similar report that discounted the inevitability of a ratings downgrade:

The president of another rating agency, Standard & Poor’s, also said that deficit-reduction plans currently being considered in Congress could be sufficient to allow the United States to keep its triple-A credit rating.

Deven Sharma, disavowed recent news reports that quoted an S.&P. analyst as saying that Congress would need to achieve at least $4 trillion in deficit cuts over 10 years to maintain the country’s triple-A rating.

Mr. Sharma told a House subcommittee that the $4 trillion figure was “within the threshold” of what the agency thinks is necessary. But he declined to draw a bright line, saying only that “some of the plans” being considered on Capitol Hill could reduce the U.S. debt burden to a level that was “in the range of the threshold of a triple-A rating.”

Shifting gears to stock market sentiment, which can be a contrary indicator when it reaches extremes, Tarquin Coe, a Senior Technical Analyst for “Investors Intelligence”, posted the following on Seeking Alpha:

Bottom line – the market has not yet reached the optimism evident at medium-term market tops. New 2011 highs for the big board indexes are yet to be registered and we see the potential for such records to be notched before the end of the summer. This week’s weakness is an opportunity to accumulate.

The CCM 80-20 Correction Index has weakened, but remains in bull market territory closing at 882 on July 27. Stocks have tended to regain their footing while within the current range. We could see some more downside in stocks and still remain in the current range.

The CCM Bull Market Sustainability Index (BMSI) remains well in bull market territory, but there is quite a bit more orange, yellow, and red not too far below current levels. We would prefer to see the BMSI hold above 2,293; it closed at 2,843 on July 27.

We will maintain our exposure to stocks (SPY), gold (GLD) and silver (SLV) while keeping an eye on developments in Washington and the risk-reward profile of stocks and commodities. As noted after the close on July 27, we hope to see the weekly chart of the S&P 500 regain some traction in the next few trading sessions.