UK Downgrade

by Larry Levin

The market opened with a thud this morning - a gapping thud. The S&P500 futures gapped down about 10.00-points due to a new wrinkle from our friends in the UK: they're spending so much money their sovereign debt may be DOWGRADED.

Standard & Poor's rocked the market when it announced today that it may lower its credit outlook on the U.K. to negative from stable for the first time ever. Why would it do such a thing? Our friends across the pond have the same financial mental disorder our Congress, Treasury, and White House are afflicted with that seemingly forces the U.K. to borrow money it cannot afford to prop up firms that should be allowed to fail. Sound familiar?

Because the US is the poster child for outrageous handouts to Wall Street, auto unions, and homeowners who bought too much house, it is believed that S&P may downgrade US sovereign debt in the future as well. And when one considers that the White House wants to add free college tuition, insurance bailouts, California and other State bailouts, and socialized medicine to the tab, US sovereign debt downgrade is all but assured.

"I think there will be a downgrade on the U.K. and I think there will be a downgrade on the U.S. outlook from one of the Big Three" credit-rating firms, said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.

What happens when a country's debt is downgraded? It is far more expensive to borrow money, turning the whole situation into a vicious cycle of more borrowing, higher payments, more debt, lower credit ratings, higher debt payments, etc.

But we don't need to worry about anything. After all, if the US sovereign debt is downgraded Wall Street will say "Well, it could be worse - it could be double-Dutch downgraded."



Previous Day's Trading Room Results:

Trade Date: 5/21/09

E-Mini S&P Trades*
(before fees and commissions):

1) Engf buy @ 9:10am at 890.75 = -1.25 (1 lot)

2) FT sell @ 9:40am at 887.50 = +3.50 (1 lot)

3) OTF sell @ 10:30am at 885.25 = -1.75 (1 lot)

4) Engf buy @ 11:40am at 887.25 = b/e (1 lot)

5) FT sell @ 12:50pm at 885.50 = +1.50 (1 lot)

6) Algorithm positions (2)...combined Secret's and Algo total...-1.25


Electronic (YM) Mini-Dow:

1) None today



Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!