Government Proposal Spooks Market

“Calling the Trend” Column, by George Leong, B.Comm.

It was looking like a good start to the year, but things have changed. Stock markets lost over three percent in value last Wednesday and Thursday following the gains on Tuesday. More importantly, the major market indices have breached technical support levels and this could signal more losses going forward. The Relative Strength of markets is quite weak at this time.

The NASDAQ breached below its 20-day moving average (MA) of 2,292. The DOW is below its 20-day MA of 10,575, as well as its 50-day MA of 10,415. The S&P 500 broke below its 20-day MA of 1,128 and is just above its 50-day MA of 1,110. Lower support is at the 100-day MA of 1,081. The Russell 2000 is below its 20-day MA of 632. Failure to hold could see further declines to other support levels.

An interesting note is a surge in the S&P 500 option volatility index (VIX) by 19% on Thursday to over 20 at 22.27. The rise in the VIX indicates increased fear in the market by traders and this could drive more selling.

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The earnings so far have been decent, but much of the results have been already discounted into the market after the gains in 2009. Traders need to see stronger results and economic renewal before stocks will be bid higher.

What spooked the market on Thursday was news of a proposal or desire by the Obama administration to control the size of banks, not wanting them to get too big. The argument is that massive banks could lead to problems, as we witnessed with the financial crisis. Yet, at the same time, the market may be wary of government interference, especially since TARP funds are being paid back. I’m mixed on this. While regulation is important to prevent another financial crisis, you also need to be concerned about increased regulation to restrict growth and expansion, regardless of industry.

The reality is that President Obama has a lot of work ahead of him as he enters his second year in office. Things are clearly not working out as he would like. War costs continue to escalate, adding to a massive deficit. Now some are arguing that this proposed regulation may be in response to the significant Democrat electoral loss in Massachusetts. With the loss, President Obama will now have to revise his ambitious healthcare plan in order to win bi-partisan approval. Nothing comes easy and there will be plenty of work ahead.

The economy continues to improve, but with numerous economic stimulus incentives ending or coming to an end, there is the threat of a dip in the economy. The government may have to ante up more funds to keep the economy rolling and avoiding a setback.