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ETF Periscope: Sheik, Rattle and Roil: Markets at a Crossroads

Posted on the 14 March 2011 by Phil's Stock World @philstockworld

by Daniel Sckolnik of ETF Periscope

“It’s not what you look at that matters, it’s what you see.” –  Henry David Thoreau

ETF Periscope: Sheik, Rattle and Roil: Markets at a Crossroads
It has taken a force of nature to knock the geo-political turmoil of the Mideast from the forefront of the financial community’s radar screen.

A 9.0 on the Richter scale is the very definition of that force.

The total damage of Japan’s ferocious earthquake and massive tsunami has yet to be tallied, and it likely will be months or even years before that read can be given with any true degree of accuracy. However, that won’t keep the market-centric universe of investors, traders and speculators from quantifying the damage in their own terms, in their own time frame.

What that means is, wild guesses of the impact upon the world economy will be coming to you right now, continually, throughout the week, in the form of the markets’ scorecards: the Dow Jones Industrial Average (DJIA), the S&P 500 (SPX), the price of crude, the price of gold.

The Japan tragedy may turn out to be the latest in a powerful tide of global events that may be tipping the market to the downside, after a long period of a happy-faced market paradigm, when bad news was mainly shrugged off like an inconsequential email.

Even before this literal seismic shift occurred, events of a socio-economic nature have been affecting the markets for the last several weeks. And while anyone with a laptop, TV or newspaper has likely been exposed to the upheavals occurring in Tunisia, Egypt, Yemen and Libya, the markets have, to a surprising degree, managed to cast aside the bulk of the concern of all this chaos.

The bottom line has been that the equity markets have been mainly in a consolidation mode for the last three weeks. The Dow has traveled in a relatively tight 400-point range, in spite of three individual days of 150 plus point moves. And while crude oil has poked its head above the century mark for the first time in a couple of years, it’s hardly the spike that you would expect to occur as a result of a really major world event.

So essentially, the equity markets are about where they started back in late January, when the realization hit the mainstream media that something significant was occurring in Egypt.

However, the worm may have begun to turn on Thursday when reports of violence out of Saudi Arabia were announced. Saudi Arabia is not Libya. Unrest in that country would likely stir the “crude oil” pot at a much faster speed and to a much higher degree then has occurred recently.

That event became, understandably, a lesser story once the news of the earthquake and tsunami hit the media on Friday. It will likely reappear very quickly, and its effect, together with Japan’s disaster, may take a synergistic turn towards the downside for the markets, depending on the perceived level of long-term impact.

The markets are arguably at the most significant crossroads they have been at for quite some time. Besides the geo-political news, a technical analysis of the equity markets is also worth a look, particularly as two big round numbers are becoming, once again, a major focal point.

The first big round number is 12,000. The Dow has been dancing around the “psychologically important level” of 12,000. That level has been tested several times over the last 5 years. It served as support back in the beginning of ’07, and several more times during the first half of ‘08, before it was violently violated in June of that year when the mortgage/credit bubble began to pop.  It has taken almost two and a half years before it again reached 12,000, and that finally occurred during January of this year. Since then, that level has successfully served as support on two occasions, before succumbing to last Thursday’s massive 200-plus point dive. Friday saw the Dow end slightly above the 12K mark, but not by a whole lot. The dance over and above this fault line could go on for a while, as the markets decide which way they want to really trend.  In the short term, it could be consolidation time, as both Bears and Bulls amass on opposing sides of this line in the sand.

The second big round number is 1,300. The S&P 500 Index is waltzing with the 1,300-price level. It is a level that has provided support from late ’06 right up until late ’08, finally falling victim to the same dark forces of overleveraged banks and bubbled mortgage markets that impacted the Dow.  In February of this year 1,300 resumed its role as support and since then has been repeatedly probed to the underside, until it too succumbed to last Thursday’s Bear march. True, it bounced back over to the upside on Friday. However, trying to follow that bouncing ball in the near term may end up causing a certain degree of whiplash.

That’s the nature of these “psychological levels,” of course. They are volatile because, well, they are psychological levels. The markets don’t have access to Prozac. They do, however, effectively express the polarized tendencies of fear and greed. This week, the scorecard will clearly state its preference.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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