August 8, 2011

Prepping for Market Selloff: 5 Indicators to Watch

U.S. stocks are set to open lower (Dow  ~-200) on Friday’s downgrade of U.S. debt and worries about Spain and Italy. Most of the world saw orderly declines last night, but a rally at the open in Europe prompted by the ECB’s debt purchases was met with significant selling pressure. A few quick takeaways:

  1. There are certainly political elements to S&P’s downgrade.  Their parent company, McGraw-Hill, has been targeted by a group of dissident shareholders, and there is pressure to split up the company.  I imagine their decision to downgrade is an attempt to deflect some of that attention.
  2. If Treasury prices rise today – a likely outcome considering the selling in equities – that would show demand for U.S. debt even in the face of a downgrade. 
  3. At this point, problems in Europe seem more problematic. We will be following market action there throughout the day and will communicate our thoughts.
  4. U.S. equities at this level are quite attractive, but that is not likely to prevent more selling.  As usual, cooler heads will prevail.
  5. As we mentioned in our August 5 commentary, hard commodities are at risk here, especially the energy complex. With the prospect of longer-term lower rates more likely, gold should not be adversely effected.

See Ben Warwick's August 5 analysis on the markets and the economy, and what he's telling clients now.

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