Normally, I tend to stick with the charts on this blogsite. I am often asked what might drive the chart patterns from a fundamental perspective. Not being an economist, I can only offer a humble opinion on why and how world events may fulfill the technical trading patterns. Given my outlook for a near termed rally for the stock markets, world events have created a new paradigm in risk management on both a macro level (big picture) and on individual securities. I strongly believe that markets may re-initiate their downward trend after a brief winter rally. Europe’s woes, alongside of those of North America, are not going away in six months time. Cash infusions by the IMF and U.S. Federal Reserve have and will continue to offer only temporary reprieve. Governments are handing the 800 lb. angry gorilla a few banana’s to keep him occupied for a while. But the gorilla remains in the room. The solution to the current economic risks will be found only through austerity measures, and it will take time for world economies to reap the rewards of implementing them.
In an email update by Tony Boeckh & Rob Boeckh of the Boeckh Investment Letter (http://www.boeckhinvestmentletter.com/), they noted “The concern is that the recent moves by euro politicians to put in place a comprehensive plan for the early November meeting of the G20 was only accomplished with heavy-handed global bullying by non-eurozone leaders. It is very unlikely that there will be a plan to deal with the systemic eurozone banking, sovereign debt, low growth, and political dysfunction problems at the root of the crisis…. Unfortunately, European leaders can only move when their feet are held to the fire by rioting markets. Therefore, we remain in the perverse situation that if markets calm down for a while and even continue the recent rally, the prospect for convincing action will fade. Consequently, we cannot assume that the worst is over in the euro crisis saga.”
I believe that the Boeckh’s have provided a reasonable explanation as to why the markets may fail once a short early-winter rally brings us back to technical resistance ( S&P 500 around 1250 – with some minor overshoot of that level possible). A market rally may imply less action is required by the European leaders, which may lead to a deepening crises in the longer term. You and I should enjoy the ride while we can.