Outlook Shaky

Charts: The S&P 500 closed at 996, up .7%, exactly at a resistance level, support is at 982. The Shanghai index crashed once again overnight in China. It is now 20% off its August highs. A decline like that would signal the resumption of the bear market in America or Europe, but for China it is only a correction verging on a bear market. Ominously, the S&P 500 swooned in the morning, catching a cold from the Shanghai sneeze. But it fought back to a gain in a very choppy fashion. The global leadership change from China to America is shakily intact. The possibility of continued consolidation in the American index is shakily intact. What we need to see is the Shanghai index stabilizing and consolidating as well or it will tear down all global markets. It needs to respond to the S&P 500’s leadership. There are a lot of moving parts to this technical picture and it is all very dicey.

Fundamentals: Reports from retailers indicate that consumers in America continue to cut back on purchases. The back to school season and Christmas are looking very grim. A welter of housing data recently points to stability in this market; which is good although the housing market is being subsidized by the government to the tune of $100 billion a year or more and it is a judgment call if after that kind of expenditure stability (rather than rip snorting growth) is good enough. Oil inventories today showed an unexpected decline, which the market took as a positive, a sign that Americans are driving more and returning to their normal gas hog ways. But oil analysts said that the big draw down was mostly due to a slowdown in oil imports, not an increase in demand. Overall the fundies are still weak.

Geopolitics: Israel has stopped issuing building permits in the West Bank, freezing its building program there, Team Obama’s main goal for the region. In response, Syria has agreed to increase efforts to stop Al Qaeda fighters from infiltrating into Iraq from Syria. Despite this good news suicide bombers tore apart central Baghdad today with 95 people killed. The attack looks like the handiwork of Al Qaeda in Iraq. US commanders are already saying that offensive operations need to be restarted in the Kurdish region. Today’s monster bombing makes it apparent that America needs to go back on the offensive throughout the country. American public opinion will be sorely tested by any announcement along these lines. In Pakistan, good guys have captured two top Taliban commanders and are now interrogating them, potentially opening a treasure trove of information. In Afghanistan, the election is tomorrow and the Taliban has unleashed a massive onslaught of mortars and rockets recently to keep voters away from polling stations. The Taliban’s goal is to keep Pushtuns from voting in the southern regions that it controls thereby defeating the Pushtun incumbent, Karzai. Most Afghanis are Pushtuns and the Taliban is itself a Pushtun organization. If Karzai loses because the majority of voters couldn’t make it to the polls, then the non-Pushtun challenger (Abdullah) will win but he will have an immediate revolution on his hands from the country’s ethnic majority. This will greatly strengthen the Taliban. It was a mistake for America to place so much emphasis on democracy in Afghanistan 8 years ago. But it is a mistake that we are stuck with and if democracy fails there, the consequences will be dire for global stock markets.