S&P 500 Strategy 24th October 2013

Strategy	Entry	Stop	1st Target	2nd Target
Long	1741.75	1737.75	1749.50	1751.75

Key Levels
1754.50	All Time High
1751.75	High of the day
1749.50	R1/ Yesterday's Open
1741.75	Pivot/Yesterday's closing
1737.75	Tuesday's Open
1734.50	S1/Yesterday's LOD
1726.50	S2/ Previous All Time High

Review After the decision to re-open the government and raise the debt ceiling, the S&P 500 has climbed to make new all time highs at 1754.50 on Monday but experienced a decline yesterday when earning valuations were not up to the mark for investors notably Caterpillar Inc and Broadcom Corp. Even after lower than expected non-farm payrolls the market has continued to rally on expectations that tapering will not happen until next year or the FED might increase their asset purchases. The S&P 500 average price-to-earnings multiple was valued at 15.9x yesterday which is still below the levels seen in October 2007(16.5x) and March 2000(25.7x) and according to Alan Greenspan, we are actually at relatively low stock prices.

Strategy I have chosen to go long today and I have identified that entering long at the pivot which is also yesterday's closing is a good entry point as the market has not breached this level since the EU market opening. The opening of the non-farm payrolls day has been chosen as the stop for this strategy which means I have a bullish view for today's direction. We will look to book profits at our first target of 1749.50 which is also R1 and yesterday's open and our second target being 1751.75 which is the high of the day. Today's initial jobless claims number keeps a huge significance as the expected number is 320k which is lower than prev 358k.

Stop (Possible Cause) A higher than expected initial jobless claim number would trigger the stop and we would look for support at S1 or yesterday's low of the day.

US Strategy 16th October 2013

Strategy Entry Stop 1st Target 2nd Target Long 1697.50 1693.25 1706.25 1717.50

Key Levels
1726.75	All Time High
1717.50	R2/Post FOMC Clsing
1706.25	Yesterday's Open
1697.50	2nd Aug Closing
1693.25	Pre-FOMC Support
1683.75	Resistance turned Supp
1675.00	Oct High-Low 50% Fib

Review With the US political unrest, the continued government shutdown and just a day away from the debt ceiling deadline, we have seen the S&P 500 drop after a four day rally. Senate majority leader Harry Reid rejected a House plan to halt the fiscal impasse and Senate leaders stopped talks on a bill that would fund the government through Jan 15, 2014 and suspend the U.S. debt limit until Feb 7 which sent the S&P 500 back down to 1689.50 but talks have re-opened and carries positive sentiment that an agreement is within reach. The four day rally was an optimistic view that lawmakers would indeed reach a deal to prevent a government default which now seems to be losing ground as we approach the deadline with the S&P 500 yesterday closing at 1692. Investors will be looking to see the Senate come through and raise the debt ceiling by today.

Strategy Carrying from the public's sentiment, there is genuine believe that the debt ceiling crisis will be averted by today and house representatives will look to re-open government. The strategy for today is to go long at 1697.50 which was the 2nd of August closing which was the highest close before the No Taper announcement. We will look to book profits at the 1st target being yesterday's Open of 1706.25 followed by our 2nd target at R2. In the likely scenario of an agreement being decided, we feel reaching these targets may well happen. Companies like IBM and Pepsi Co. will also be announcing their Q3 results which might stir up movement going into the cash open.

Stop (Possible Cause) A break below the Pre-FOMC meeting may well start a downtrend as seen previously in early October. This can be triggered with a failure by the Senate to come to an agreement in time.

Debt Ceiling Crisis on S&P 500

S&P 500
If in the case the US fails to meet its debt obligations, it will be a catastrophic event not just for the US economy but for the global economy as well. With countries like China ($1.3Tln holder) and Japan ($1.1Tln holder) that have heavily invested in the US national debt are greatly concerned. 

The US government is scheduled to pay debt service , social security benefits, medicare, military payments and according to Lew the treasury has $30Bln of cash left by Oct 17th to meet these commitments. The treasury will need to borrow more to meet its liabilities or severely contract its spending which would in turn negatively impact the GDP. This event would create a liquidity issue leading to a credit crunch where banks would have to write down securities on their books that are losing value and face capital shortfalls. And this time around the government wouldn't have the cash to rescue the banks. 

The default could potentially mean that Interest rates including mortgage rates would skyrocket, credit spreads would widen, the US dollar would severely devalue and household consumption would dramatically fall. With borrowing costs increasing, US company's earnings would start to diminish and hence the S&P 500 index would lose ground. In my view the S&P could reach to 1600 or below if the default happens.