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Can Central Banks and Governments Stop the Tidal Wave?

Courtesy of John Nyaradi

Financial Tidal Wave

Fast moving developments in the “Greek Tragedy” pressure central banks and governments to prevent a Greek default and a potential tidal wave of financial calamity across Europe and the rest of the world.

On My Wall Street Radar

Last week, markets staged an impressive bear market rally but were repeatedly stopped at significant technical resistance levels.  Much of the cheer came from the central banks’ global liquidity intervention on Thursday, but that was perhaps particularly chilling in that it came on September 15th, the 3rd anniversary of the collapse of Lehman Brothers which touched off the financial crisis that we still live with today. 

S&P 500 (SPY)

chart courtesy of StockCharts.com

On the chart above you can see how the rally stopped at significant resistance and that the 50 Day Moving Average is just above which also represents significant resistance.  The “death cross” remains visible and the index is still below its 200 Day Moving Average which is widely viewed as the boundary between bull and bear market.

Furthermore, using point and figure charting not depicted here, the index broke through the bullish support line and is now in a bear market trend, as well.  These lines in point and figure methodology tend to act as very hard walls less subject to whipsaws and reversals than the 200 day moving average, and so it will be very difficult to call this a bull market for quite sometime.

The Economic View from 35,000 Feet

Last week’s economic news continued to be glum and further confirmation of a slowing economy. 

As reported in our nightly emails during the week, small business confidence dropped for the sixth month in a row, retail sales for August showed 0% growth, weekly new unemployment claims climbed to 428,000, up from the previous week and missing expectations, and the Philadelphia Fed and Empire State Index reports both declined from previous readings and more than expected.

The Census issued a shocking report indicating that one in six Americans lives in poverty, an all time record at 46 million, and that medium income today is below levels last seen in 1999, and so truly we have had a “lost decade.”

But the real spotlight was on Greece and the tensions for a possible “Lehman” event resulting from a Greek default.

Treasury Secretary Geithner made two trips to Europe in a week and there were conference calls by the French President and German Chancellor and high level meetings to persuade the world that “Greece is good.”

The Europeans rejected Geithner’s proposal to leverage their bailout program and on Saturday Greek Prime Minister unexpectedly cancelled his next week’s visit to the United States to return to Greece to manage the crisis in what was described as a “particularly crucial” week..  This is interesting because his scheduled U.S. meetings included talks with IMF head Christine Lagarde, U.S. Treasury Secretary Geithner and a speech at the U.N.  On Sunday, the Prime Minister chaired a special meeting of his cabinet to deal with demands from the European “troika” to qualify for the next tranche of bailout money due in October.

European financial leaders postponed a decision on releasing the next tranche of bailout money for Greece, and the bond and credit default swaps markets aren’t buying the “Greece is good” mantra, either, as rates and insurance costs remained at highly elevated levels.

It was also a bad week for European banks as UBS was apparently hit for $2 Billion and the ratings agencies are on the prowl to downgrade banks with too much Greek exposure.

Finally, the “Congressional super committee” leaders held interviews outlining their shared hopes for a compromise on the deficit ceiling debate that has ten weeks to run before mandatory cuts are imposed.

What It All Means for Stock Market and ETF Investors

What it all means is that most likely the Greek drama is far from over.

In fact, it’s probably worse than previously imagined if the central banks saw the need to intervene as forcefully as they did on Thursday, the next bailout tranche was delayed and Papandreou unexpectedly headed for home.

It means we are in a bear market and will see bear market rallies, and I agree with Christine Lagarde, head of the International Monetary Fund who said last week that a sustainable recovery was possible but that the path was  narrowing.

Wall Street Sector Selector remains defensively positioned, expecting lower prices and more volatility ahead.

This Week’s Business and Financial News and Economic Reports

The big event for the week will be the FOMC announcement on Wednesday in which markets widely expect Dr. Bernanke to unveil some new form of quantitative easing, most likely “Operation Twist,” in which the Fed will rollover its short term assets for longer term maturities.

Whatever comes from this meeting will have significant impact on the global markets.

Lesser tidbits are monthly reports from the housing industry scheduled to arrive on Monday, Tuesday and Wednesday.

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