Tuesday, April 28, 2009

Mexican Flu Rattles Markets

With just a couple of days left in the month, my attentions are turning to my monthly analysis. Last month, I detailed several scenarios that I thought the Dow could take. I always feel most comfortable when I see a three period test of the low. April data is playing right into this scenario. Granted, there are three trading days left in the month and anything can happen but seeing how the pattern is developing, it is my best guess that the stock markets will fall next month, testing the lows or at the very least, the red support line.

There appears to be a heavy supply of news that could be interpretted negatively causing the market to again collapse. The bank stress test results so far have been pretty lame. Who among us doesn't believe that the banking system is still in trouble? More and more people continue to lose jobs, consumers are tightening their belts, spending only on necessities. And the biggest potential problem is the Mexican Flu situation. I can't think of anything that has to potential to rock our world sufficiently enough to drive the markets below the February lows than this.


The chart of the monthly 10 Year Interest rate shows a successful three month test of the low. As expected, rates are up this month but despite this bullish pattern, trying to get a handle on the news that may affect this market is confusing. There is still the red colored trend line that must be respected. This comes in at the 3.20% level. Yesterday my daily chart work targeted a much higher level and truly, this chart leads me to want to bet that rates can easily reach the 4% level again, if we can just clear the 3.2% hurdle.

Rates have fallen this week as the Mexican Flu worries have stimulated a "flight to safety." But how safe are Treasuries? How safe is the dollar? The Treasury and Federal Reserve have been taking huge bets that their stimulative efforts will revive the economy. For their gamble to pay off, the economy needs to rebound with significant growth. What happens though if we are hit with another panic situation? What happens then? I can see it now, government officials, bank CEOs, major manufacturing companies on tv; will be explaining that it is the Perfect Storm. We could have never seen this coming! Of course not. It's called RISK!

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