"At some unknown point, easy money turns into excess leverage, reduced deflation risk becomes inflation fear, fiscal stimulus becomes sovereign credit risk," says the J.P. Morgan Chase asset-allocation group in a recent note. "We can't tell where this turn comes, but history warns us it tends to happen suddenly and violently. As investors, you can't always focus on tail risk, but it makes sense to tilt portfolios toward them." W$J story
The Shanghai Composite Index plunged more than 5.2% on Friday on fears China would hike rates over the weekend. China was the focus on Friday with inflation at two-year highs and worries over further tightening to slow its rise. China's inflation for October came in at 4.4% and nearly a full point higher than the 3.6% rate in September. Rampant inflation in China caused worries about a new round of tightening and crushed commodity prices and equities.
However, as Itz has pointed out over the last few posts, the markets were looking for a catalyst to sell the news. This rally started back on August 27th when Fed Chairman Ben Bernanke announced more quantitative easing. The first week of November the markets were treated to the FOMC $600B QE2, midterm elections with a Republican win in the house and the positive October Nonfarm Payrolls report. However, this week test the 2 month rally, with negative feedback from G-20 toward US policy, one of the worst earnings reports from Cisco & then Friday's China news. It also doesn't help when you have veteran investors like Jeremy Grantham calling for S&P 900 & Ken Heebner selling Apple shares.
So getting back to inflation...this weeks economic reports tackle that question. The PPI on Tuesday and CPI on Wednesday would normally be worrisome because of the inflation component but inflation is currently near zero. That makes them important only if they show a sudden spike in the core rate of inflation.
So what to do in the coming weeks? As pointed out in past posts Itz has been anticipating a pullback in the markets and welcomed it. Some asset classes & stocks were getting parabolic. Itz Stock Chartz remains long term bullish and is the 'Buy the Dip' camp. The problems in EU will get solved and the current panic will subside as it did before. Even if China does hike rates the country, their economy will still continue to grow at 10%, so the impact to commodities will be minimal at best. Really do most larger investors truly believe things have changed that much in just a short period of time?
More than likely the China and Ireland/EU stories will spill over into the coming week and that the major indexes will see lower support levels tested. Itz has pointed out, as for the S&P500, that it was setting up a handle in the Cup & Handle formation (see past charts). Some technicians have cited a 'Double Top'...sorry don't agree. The bears will try to say the market is overbought and over valued, actually it is selling for 13.5xs earnings, cheaper than the 15xs at the April '10 peak?!
This is the pause that refreshes, pick your own specific support levels near term...but remember...'Don't fight the Fed!'
Since September 1, 2010, Itz has pointed out the the $SPX was set to rally & test the 1225 level. >>LINK >>LINK