How do you trade the S&P 500 after Germany says no to a quick fix?

COT Data

On this past Friday’s COT report we found commercials net-long 250,361 contracts and the previous Friday, Oct. 3, the commercials were net-long 211,329. That’s 39,000 contracts up. This definitely helped the market climb last week.

Everyone had high hopes this weekend as the G-20 requested a plan for Europe dealing with the debt problems and they gave them a deadline of Oct. 23. Well, Germany responded to this today saying no to a plan by Oct. 23 has the market dropping. How many times have we seen the markets up and down over the EU debt crisis? One day it is fixed, the next day it is still broken with no end in sight. Even optimism for Q3 earnings can’t compete against an EU collapse.

Commercial Net Tracker instructions: This form tracks the Commitment of Traders (COT) data for the commodity futures market. This form "looks" at the most recent five weeks of COT data and provides visual indications of the data. A) If the current value is at a 12-month low, the cell will display a red/burgundy background. B) If the current value is at a 12-month high, the cell will display a green background. C) If the current value went from net negative to net positive, the cell will display a blue background (indicating a bullish condition). D) If the current value is both a 12-month high and also went from a net negative to a net positive, the background will be green. You should view the data with green backgrounds to determine if they also went from net negative to net positive.

If you need help understanding how to understand how to use the COT report to your benefit, please email me at Gary@crbtrader.com and put COT report in the subject line. Please include your name and telephone number in the email.

Proceed to Page 3 for this week's detailed fundementals charts...

Fundamentals

The S&P 500 index recovered to a three-week high from its recent 13-month low on Q3 earnings optimism and as European debt concerns receded.

Bullish factors include:

1. 1. Reduced European debt concerns after European Economic and Monetary Affairs Commissioner Rehn said the Eurozone is moving toward a consensus on resolving the "calamity" of the sovereign debt crisis as European Commission President Barroso called for a "coordinated approach" to deliver a "significantly higher capital ratio of highest quality capital" for banks.
2. 2. Q3 earnings optimism as the market expects earnings per share for the S&P 500, excluding financial companies, to rise a healthy +14% y/y.

Bearish factors for stocks include:

1. Heightened European banking concerns after the ECB warned in its monthly bulletin that involvement of the private sector in Eurozone bailouts through enforced investor losses is a risk to financial stability and would have "direct negative effects" on the banking sector.
2. Concern that economic growth in China, the world’s main growth engine, may be stalling after September Chinese exports rose +17.1% y/y, weaker than expectations of +20.8% y/y and the slowest pace of increase in seven months.

Fundamental outlook — Bear market correction — Stock prices rebounded from their recent 13-month low on signs that European leaders are taking concrete actions to resolve the region’s debt crisis along with optimism over the upcoming Q3 earnings season. The medium-term trend could turn back to bullish if prices can post a decisive new two-month high. Two factors providing some underlying support include record low interest rates and very reasonable valuation levels with the low forward P/E of 12.0 (vs. the five-year average of 14.9 and 10-year average of 16.7).

Have a prosperous trading week.

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