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GBR Market Wrap: June 10, 2011

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In this Week’s Issue

Weekly Snapshot

• Dow sinks below 12,000; stocks had the sixth straight weekly loss (AP)
• China posted a smaller-than-expected trade surplus in May of $13.1bn (Reuters)
• The average U.S. homeowner now has 38% equity, down from 61% a decade ago (AP)
• Fed surpassed China as the largest holder of U.S. Treasuries (Reuters)
• ECB kept interest rates at 1.25% but signalled July rate hike (CNBC)
• Brazil increased interest rates by 25 basis points to 12.25% (
• Revised data showed Japan’s economy shrank 0.9% in the first quarter (Reuters)
• U.S. trade deficit narrowed by 6.7% in April to $43.7 billion (AP)
• Fitch warns: U.S. Treasuries could be rated junk in August (Reuters)
• Fed survey: Economy falters in several U.S. regions (AP)
• Euro area GDP rose 2.5% compared with the first quarter of 2010 (Eurostat)
• Bernanke signals that the Fed is not planning to ease monetary policy (FT)
• Industrial producer prices for April rose 6.7% y/y in Euro area (Eurostat)
• OPEC unexpectedly decides to keep oil production output unchanged (AP)

Market Barometers

Stock Market Barometer 6-10-11

FX Barometer 6-10-11

Weekly Chart

QE2 (Quantitative Easing) is coming to an end this month. Sounds like a good time to assess some of the impacts of the Federal Reserve’s recent asset purchases. Please consider our weekly chart courtesy of Global Macro Monitor. In case you were wondering why interest rates are still at rock bottom, here is part of the answer. However, as many prominent names including PIMCO’s CEO Bill Gross have been asking: What happens when the Fed stops purchasing treasuries?

Chart: Treasury flows

Lines In The Sand

Another week, another big sell-off and I can’t help thinking how much this market reflects the “June-Gloom” weather here in Southern California. We have been looking at the S&P 500 chart with a cautious approach for quite some time now and suggested that there is some considerable risk for a market correction. In one segment we referred to Barry Ritholtz who recommended drawing some lines in the sand. How much pain are you willing to take in terms of your portfolio?

There is some hope though in that the majority of traders seem to agree where that line in the sand is; 1250 on the S&P 500 has been the consensus for a major support. Most of the chartists seem to point to that level as a hard line in the sand. This also suggests a sort of self-fulfilling prophecy might be at play here—it is the main reason why technical analysis works in the first place. When enough people believe 1250 to be a strong support, it may actually come true.

The previous low earlier this year was 1249. This week, we came one step closer to that all-important support of 1250. Yet, the momentum is also slowing down, suggesting that the sellers have been reducing some of their positions recently.

SPX chart

What’s next for you? If your time horizon is short-term, you would have been stopped out of the market some time ago already. As for those who have a slightly longer investment horizon, you may want to draw your own line in the sand, perhaps not directly at 1250 but somewhere close enough below it. How much pain you are comfortable with determines your line in the sand.

Recommended Read

One month ago, we brought up the good old “Sell in May” rule which suggests to exit the stock market and wait until the end of summer to consider buying stocks again.  So far it looks like the old saying is spot on and it shows that investors actually acted upon the rule. Please consider Michael Mackenzie & Michael Stothard’s FT article which notes that U.S. equity outflows are the largest in 10 months.

Good luck and good investing!

Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at and He also authored the book, Money Music 101, available on Amazon and Kindle, in addition to publishing the popular investment blog along with a weekly newsletter.

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Author of the article
Clemens Kownatzki, MBA
Clemens Kownatzki, MBA
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