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October 16, 2009

Losses at Bank of America Fuels Equity Market Selloff
by Brewer Futures Group

U.S. equity markets are tumbling this morning after Bank of America reported a loss and General Electric posted less than stellar results. Failed loans at Bank of America triggered the loss which served as a reminder that some U.S. consumers and businesses are having a hard time paying back debt.

Investors reacted to the news from the get-go this morning with heavy selling pressure. All three major indices face the danger of a weekly technical reversal top which could lead to more serious damage to the markets next week. Analysts have been calling for a sizeable correction for some time, and this morning's bad earnings news could be the catalyst for the start of this correction.

A close under 1068.00 in the December E-mini S&P 500 will reverse the weekly chart to down. Traders should watch 9807 in the December E-mini Dow and 1725.50 in the December E-mini NASDAQ. These prices are very important today and may serve as intra-day support, but carry more weight at the close.

Treasury futures are reacting to the negative stock market news by rallying in a flight to safety move. Traders are reallocating funds from the equity markets to the financials markets in an effort to protect their investments against a possible sharp break in stock prices. In addition, Treasury Bond and Treasury Note yields have risen enough this week to once again make these fixed income vehicles attractive investments. Look for the rally in Treasury futures to continue throughout the day if demand for higher risk assets continues to fall.

The U.S. Dollar is posting a strong gain this morning as demand for higher risk assets is falling. The weakness in the equity markets is a huge contributing factor to the rally in the Dollar, but additional news is also driving foreign currency markets lower. The Swiss reported weak retail sales which is contributing to the weakness in the December Swiss Franc. A bullish technical formation and a change in trend to up on the daily chart are helping to boost the December Japanese Yen. The December British Pound is posting a strong gain as traders continue to unwind bearish spreads. The Pound is rallying because investors are reacting to the news that the Bank of England may end its asset buyback program. This means less liquidity in the market and is also a sign that the economy may be recovering.

Precious metal futures are down because of the stronger Dollar. This down move began earlier in the week when December Gold and Silver diverged from the Dollar index. Investors feel that metal prices are overbought and overvalued. Indications are that both silver and gold have substantial room to break to the downside. The first target for December Gold is $1028.80.

The break in equity markets and lower demand for higher risk assets is pressuring traders to take profits in the December Crude Oil market. Today's weakness makes it look like the rally earlier in the week was most likely short-covering rather than fresh buying. There is no doubt that stop execution led to yesterday's breakout over $75.00. The question remains whether investors will buy this market on the next dip. Bullish supply and demand data contributed to the rally earlier this week, but investors may be waiting to see if the lower supply news is a trend or just a one-time event.

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Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.