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Ceiling not raised, floor to be challenged

11/01/2011
At the end of a historic October, the market was positioned to “raise the ceiling” toward the 1300 to 1325 range. An obvious near-term failure has occurred. Global equity markets have corrected sharply this week after posting a 1292.66 high on October 27. For those looking for a “line in the sand” during this correction, use 1183.00, the midpoint of October’s trading range. For those seeking the culprit for the sharp reversal, please look toward the Italian bond market, where yields have risen to uncomfortable levels once again. 
 
I expect in a few weeks we will look back upon the correction and the rise in Italian bond yields, and find the fall of MF Global was a significant contributor. MF Global’s positions are being liquidated. On MF’s October 25 conference call, they identified $2.9 billion in exposure, holding Italian zero coupon bills with a maturity date of December 2012. Forced liquidations are never a favorable condition for the markets and an environment during which I encourage investors to avoid making meaningful decisions.
 
An abundance of data is ahead of us this week – China PMI, U.S. ISM, the FOMC’s decision, G-20 meeting, and central bank rate decisions from Europe and Australia. That should be investors’ focus and provide insight on whether the market can “raise the ceiling” toward 1300 to 1325 before year’s end. I expect the bottom for 2011 was found in early October. Now it is a question of how much higher the market can push before year-end. I suspect somewhere between 1257 and 1325 is where we will land on December 31, 2011.
 
 
Figure 1.1  S&P 500® Index Year to Date

Source: Bloomberg
 
Figure 1.2 Italian 10-Year Bond Yield

Source: Bloomberg

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