US Stock Market: Fundamentals And Technicals

Fundamentals

The equity markets are lower once again this (Friday) morning, as traders show their displeasure with the government’s handling of the economic crisis. CNBC host Rick Santelli may be calling for a “Chicago Tea Party” in July, but equity traders have already jumped the gun and begun dumping shares into the Hudson. Joking aside, the host’s opinion is echoed by many economists and the general public alike. The Obama administration’s plan to force banks to lower interest rates and, in some cases, reduce the principle amount of loans will do little to help the slumping housing market. The plan may cost much more than earmarked, as it would likely undermine the bank bailout program - a program many traders didn’t like to begin with.

Struggling banks will look to make up the lost value of these loans by charging unusually high interest rates to credit-worthy borrowers on new loans. This may cause house hunters with good credit to avoid looking for homes, which in turn, could result in a slow, grinding bottom in the housing slump. The quicker we reach a bottom in housing, the quicker the market will recover. It goes to show that thanks to government intervention, while well-intentioned, the plan may not result in economic progress, but rather undermine the foundation this economy was built on.

Bank of America (BAC) CEO Kenneth Lewis was subpoenaed by New York Attorney General Andrew Cuomo regarding the acquisition of Merrill Lynch. The news has sent the bank’s stock tumbling. Doom and gloom continues to hang over the auto sector, as GM (GM) subsidiary Saab filed for creditor protection. The government is still weighing its options on how to structure a bailout of GM and Chrysler, hoping that throwing taxpayer money at the problem will fix decades of mismanagement and union muscling.

Economic data released this week was very poor, with housing, unemployment and manufacturing data all coming in weaker than expected. Today’s only major economic release is the CPI indicator, expected to show a very mild 0.3 percent rise in the overall figure and a 0.1 percent increase in the core reading. Today is equity option expiration, which means the market could be more volatile than usual.

Technicals

The March E-mini S&P chart is quickly approaching November lows. Unlike the mini Dow, which covers a much narrower spectrum of stocks, the S&P was able to avoid breaking these lows in overnight trading, which may be somewhat encouraging. If the S&P is unable to hold this key support area, the index may not find support until it hits the low 600’s. Momentum is showing strong bullish divergence from both price and RSI, hinting at some near-term strength. Prices may have to push through the 800 level to the upside in order to fall back into the range seen over the past three months.

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