Thursday, August 4, 2011

What's Next for the Stock Market? (Maybe a game of limbo-stick?)

In a post to the Buzz & Banter, published Monday afternoon, I wrote the following:

Putting all of this together, my take on the most likely scenario going forward is the following: After a relief rally associated with the passage of the debt ceiling legislation today or tomorrow, I believe that the market will tend to drift down towards the 1250-1260 support band in the next couple of weeks. I believe that if the market visits that support area, there is a better than 50% probability that it will violate it. The reason is that I think poor economic data pertaining to July and released in August may weigh heavily on the market during the entire month. If the market violates this key support band around the 1250-1260 area, at that point we would dealing with the specter of a potential cyclical bear market.

It didn’t take long for that scenario to play out, did it?

As a result of this move I sold the remainder of my SPX put positions earlier today with the S&P at around 1,235. I remain long VXX, as I believe that implied volatilities are still low.

So, the question is: What happens now and what to do going forward? A few thoughts:

Europe is a major key. The woes of the Old Continent are back on the front pages. The bond market is taking things into its own hands and sovereign debt yields for Spain and Italy are spiking towards levels which, if sustained, will catalyze a major crisis with global implications. Thus, it would not be wise to buy stocks anywhere in the world until one can gain an insight that concludes things are going to be brought under control in Europe. (more)