Last week most traders left town to visit their families over the Thanksgiving holidays and the stock market basically went nowhere. What it did was go into a well defined short-term trading range with 1200 acting as resistance on the S&P 500 and 1170 acting as support. The day before Thanksgiving it moved up to the top of that range only to fall back down again on Friday.
Over the weekend Europe announced an official bailout deal for Ireland, which includes $115 billion dollars in new loans at a 5.8% interest rate. It also forces Ireland to take austerity measures such as raising taxes, cutting wages on government workers, and raising the retirement age to 68. The people of Ireland will pay for their troubled banks and the banks will pay nothing.
This is always what happens with IMF style bailouts. The banks get caught in moral hazard since they know they never pay for overleveraging themselves and once they get to a crisis point governments bail them out. Then when the government debt grows so large to scare off foreign creditors a bailout for the government is created and with it are demands that the people pay up in higher taxes, lost jobs, and frozen pensions. Often these measures cause the economy to fall apart and the economy shrinks so much that the revenue going into the government falters and they become unable to pay the debts anyway, even with the new bailout loans. Then there is a total economic collapse.
This is what happened in Argentina. It appears to be what is happening in Greece and some in Ireland are saying that this is what is going to happen with this deal.
Most IMF style bailouts don’t work. What they really amount to is buying time for banks to suck the countries dry as much as possible. The banks never pay. Never are loan payment terms changed. A simple thing would be to extend the payout periods on the loans and lower the interest to make them more manageable, but bankers will never allow this. They cause the crisis, but are always given a free pass, because they hold all of the strings.
If you pay any attention you know this is exactly what happened in the United States with TARP in 2008, and we as Americans are going through the period of wild government deficit spending to pay for the bailout and will soon see the start of the next phase with higher taxes and higher inflation next year.
Last night before I went to bed the global markets were up a bit on this bailout news, with S&P 500 futures up 7 points, but this morning Europe is selling the news and the US futures are almost even in the red before the open as I write this. The worry is that the European debt crisis is going to spread to Portugal and Spain.
Last week the market went sideways, this week it is likely to bust through this sideways range to bring us some fireworks. The next big move in the market will come either when the market breaks through the highs of last week – 1200 on the S&P 500 or goes through the 1170 support area. I think the latter is more likely and if it happens then I expect a drop back down to the markets 150 and 200-day moving averages at a minimum. In fact it could happen quickly, because the market is so dominated by electronic trading programs that are likely to sell in unison on a breakdown.
On Friday I made a post of how you could use SDS to make a trade against the stock market if you want to. To read it go here.
We are making some new changes and new additions to the service. If you look at the power investor section on the right you’ll see some new headers:
We plan on making at least one post with one of these headers before the market opens each morning. A post on sector analysis will break down one sector in the market we are watching and the stocks in it. ETF Trading will be a specific trading idea for an ETF. Stock Picks will be either a stock we think is good to buy now or are planning on buying on a dip or more consolidation. Strategic Thoughts will be posts about what I am doing with my money or planning on doing based on my views of the market.
We are trying to organize things better and also have more specific trading ideas going forward for you. Our idea is to highlight one stock, etf, or go through a whole sector every morning and talk about the technicals around it. Even if we are not buying it right at that moment – and there will be times we will be – we think this can show you things to keep an eye on, to look to buy on dips, and be educational too.