Welcome to dead center!
We are finally back to the middle of our predicted trading range. It’s the range that our 5% rule predicted since October of 2008 so we’re hardly going to be shocked to be here now. Usually we are shocked when we’re NOT in our range. I detailed the movement this weekend in our 5% Rule Update, so I won’t get into it all here but let’s just focus on our short-term chart and embrace the uncertainty as we move back to the middle of our range at 1,100.
I say it all the time and I’ll say it again: I’m not bullish or bearish – I’m rangeish. That means I get more bullish at 5% under our line and I get more bearish at 5% over our line and I get extremely bullish or bearish as we get into that 10% zone because – if the market fundamentals don’t change – then my midpoint doesn’t change and the opportunity is to play us to return to "reality" at S&P 1,100 (Dow 10,200).
Just look at those nifty little resistance points we have to watch now – the 200 dma is at 1113 and the 50 dma is at 1,084 and we just ran up from 1,030 (we ignore spikes) past the 5% rule at 1,081, which just so happens to be pretty much the 50 dma so that will be our key test for the week as our bottom to top run from 1,101 to 1,102 is close enough to 10% to merit a 2% (20% of the run) pullback back to, WHOOPS!, 1,080. So 1,080, 1,080 and 1,080 is our line in the sand for the week. If the rally is real, the number will hold and, if it doesn’t hold (especially with all the earnings and economic data we have coming in) then we have to look at the drop from 1,220 to 1,020 (200 points) and consider the move back to 1,120 nothing more than a strong, 50% bounce back to our mid-range.
We are past the EU Stress tests but JPM says 54 banks should have failed for the following reasons:
- Lack of rigour in macroeconomic stresses, leading to low virtual portfolio loss rates
- Sovereign haircuts were applied only to trading books and not to accrual books
- JPM estimates show that the lack of rigor in CEBS stress scenarios resulted in a 1.7% upward bias to Tier I capital ratios
- The focus on Tier I (not core Tier I) resulted in a 1.2% lower capital hurdle for a total bias of 2.9% in Tier I capital ratio estimates