Why we should view the S&P downgrade as the final warning of a US default

Yesterday, Standard& Poor’s, one of the three best known credit rating agencies, downgraded the US debt to AA+ from AAA. Yes, this is a historical moment as the US debt credit has been an absolute AAA since the times of the founding fathers.
There is no question that the downgrade will cause a panic on Monday. Yes, people are not going to dump the US debt because it is still one of the most attractive assets in the world. However, bear in mind that the downgrade will increase the likelihood of a US default on its obligations. Here is why.
The AA+ credit rating means that US will likely to pay more interest on every dollar it borrows in the future. The US hardly avoided a default on Tuesday and a higher cost of borrowing is going to make the situation even uglier. We need to remember that the debt deal reached on Monday is a deal that pays the current obligations by borrowing more. In other words, US has been avoiding a default simply by relying on its low borrowing cost. The US has lost this advantage.
Secondly, with S&P lowered the credit of the US, we cannot be sure that the other two major rating agencies will not do the same in the future. Rating agencies are largely criticized by the public for their failure to perceive the risk of CDOs during the 2007 crisis. It is a positive thing for us to see that S&P has learned a lesson from these criticisms. Fitch and Moody’s will be risking their reputation if they choose to keep the credit rating of the US as it is while the country is having trouble to pay back its debt.
We will see the reaction of the market on Monday, but investors will most likely pull money out of the US stocks and bonds in seeking for a better heaven, such as gold and platinum.

So where are we heading to?

The S&P 500 gets a little support today and closes at 1260 after nine losing days. Even though the market is up today, it does not mean that we can start to buy and wait for the position to surge. Today's rally only shows that investors feel uncertain about the economy and the employment data coming out on Friday. As I have covered in my previous post that we still need to be careful about the US economy even the US has avoided a default on Tuesday.
The compromise on the Capitol Hill does not change the fact that US has a large gap in its budget deficit. The economy is getting weak and I do not see any good reason for the job market to improve.
So what should we do now? From a pure technical point of view, we are still in a very bearish environment. The Double Top Pattern and a break out of the support line have told us that the market is still negative. Tomorrow's initial claim will likely to be disappointing and investors’ bearish mood will get confirmed.
Gold is still my biggest buy as we can see it makes new high every day. We can also put some value stock in our watch list, such as Google, Apple and Microsoft. These stocks have been brought down by the broad market and they will offer a good return once the market comes back.

Weekly Market Direction (0801)

The market rallies on the news that the two parties have reached a debt deal. This certainly gives investors a relief that the US will not default on Tuesday. However, before we get too optimistic, we need to understand that we are still facing a weak GDP for the second quarter, a high unemployment. The gold prices have showed us that investors are still a little bit skittish about the economy and the future of the US credit. Today's rally does not necessarily ensure a trend change. My suggestion would be to wait for a trend change and then get in.
Stocks that will perform well include GOOG, APPL, MCD, MOS.