What a Week!

Although S&P500 tested the 1,120 level, it ended the week well above it at 1,136.43. We note that this was a pretty bad week with the S&P500 taking a dump and finishing the week down 6.5%.

The equity market actually had a better week than the commodity markets as the Fed disappointed everyone with its announcement on Wednesday. As we touched on it before, gold did slide back down and it appears it is well on its way to fill the gap that we talked about a few weeks back. The approx. 155 support level for GLD is still there, but if we don't see at least some upward movement early next week, this falling knife could pick up speed and not ease until it hits around 150. GVZ, the gold volatility index, shot up nearly 22% today and closed at new 12-month high of 39.17. Even with such pullback, which we expected, GLD is up 15%+ YTD, compared with S&P500’s near 10% slide. At 150, GLD would still be up around 9% YTD. Of course, that is nothing compared with betting on volatility, which, based on VIX, has had a 140%+ YTD return.

S&P500 did not break below its 1,120 support level, which is good news at least for the time being. We believe the risk of going below that remains as long as S&P500 doesn't 'settle' around 1,150 - 1,160. This index has been trading erratically between 1,120 and 1,220 since early August. And it has not created a base anywhere within that range during those near two months. So, although we are slowly getting our feet wet again when S&P500 dips below 1,150 (by continuing to long non-cyclical sectors and slowly getting into a few cyclical ones), we remain cautious. If it breaks through that 1,120 support level, then we would be more aggressive in longing more cyclical sectors (ETFs) and high quality companies within those sectors.

As usual, some market moving data is due to come out next week - new home sales (Aug.), Case/Shiller home price index (Jul.), Consumer Confidence (Sept.), durable goods orders (Aug.), weekly initial claims, personal income & PCE (Aug.), Chicago PMI (Sept.) and the University of Michigan/Thomson Reuters consumer sentiment (Sept.). We expect the PCE price index to surprise on the upside. It will also help explain why the Fed chose the 'Operation Twist' and why it is divided internally when it comes to printing more money. In addition, new home sales could disappoint, especially after seeing just how foreclosures, investments and all-cash transactions drove the better than expected existing home sales. Lastly, growth in personal income during Aug. was likely negative, and if so, it would disappoint as the market expects no change. When companies are not hiring, they are also not increasing wages; and August was certainly a month that many companies, individuals and lawmakers would rather forget.