Darshan's Blog

Thursday 29th October, 2009

Will the US GDP shock or surprise today?

Hello all!

Alright alright, so yesterday didn't quite work to plan. I hold my hands up - shoot me. (Hey we will get a bad day :-)) However, one day means nothing - I'm still sticking by my thoughts that we are simply being set up for bear trap and that we should test and exceed the top on all the indices, as soon as the Treasury auctions are out of the way. The final auction is for the 7 year note and that is today! Coincidence or what? Yesterday was nothing but a flush to knock out sell stops and weak longs. Simple. If it was real panic selling, then we would have seen an acceleration in the selling, not a deceleration in the pace.

Yesterday we saw risk coming off the table, with heavy dollar buying but hey this coincided with the 5 year note auction...so no wonder there was dollar demand. Either way, commodities sold off and while the headlines are saying the drop is down to risk being reduced before the US Q3 GDP numbers out today at 8.30am (US EST), I think it was all about the primary dealers selling equities to make Treasuries look attractive.

So let's look at the technicals - sure the Dow and the SPX closed below 9800 and 1050 (most importantly the SPX closed below the 50 DMA)...so technically, we should be selling this market like mad. However, that is how traps are set. So I am not denying that we can't go lower from here and find a floor somewhere in the 9500s and 1020-30s on the SPX but I'm also being careful of a huge short-covering rally taking us right back to the top.

So once again, it's time to keep your powder dry - my advice is the same as yesterday - don't try catching a falling knife but don't short a trap either. Just sit patiently on the sidelines....you should have bought protection via puts when we were above 1100, as I advised then but for now it's better to wait. The indices are now definitely in oversold territory so a bounce is definitely due. We need to see what happens to the SPX after it bounces to about 1054-55 - as it could turn back down at that point, before the final flush down prior to the rocket up. Whatever, happens, I refuse to be caught in a trap.

Today is another test of technicals vs fundamentals. The GDP figures could either cause the quick spike down on the indices and then a sharp reversal into next week or just shoot up right from 8.30am (US EST). Remember there has been a tonne of Government stimulus in Q3, so that is why they are expecting GDP to grow by 3.2% - a huge increase from the -0.7% figure from the previous quarter. Of course our friendly bank - Goldman Sachs - yesterday issued a note saying they had changed their forecast, to a lower number of 2.7% growth. This was released yesterday, so we could ask - is a disappointing GDP figure already priced in now? Let's face it - these markets have not listened to the terrible fundamentals all year, so why start now? If there is a sell-off it will no doubt be to the levels stated above and that should be the final flush of the weak longs.

While the news and other financial blogs are calling this the start of the collapse on the equities, I will remain solid in my conviction and argue that this is not true. The collapse will only happen, when the USDX has bottomed and I just don't think it has until it tests 74.75. It certainly was getting close to do doing so but then $123bn of Treasuries got in the way. So it seems this will come in November instead. Stay focused as always for it because this week has been a test of how quickly the bubble can unravel. It's a warning shot - so don't get complacent.

Happy trading!

Darshan

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