Fog Begins to Clear in Europe

No, this blog is not venturing into the weather forecasting business. We’re still all about the financial markets. Though many details remain to be fixed, we have the beginnings of some clarity in the European debt crisis. In yesterday’s post my speculation was that anything short of a 60% haircut on Greek paper would be well received. The number appears to have come in at 50%, and the European equity markets have reacted favorably. So far so good.

Also worthy of note, as of this writing the U.S. dollar index has broken below the 76 support level, and the euro is above $1.40 resistance – for some time its own support. Should this condition prevail, our bullish outlook on the equity markets will be reinforced, although I still would not be surprised by further consolidation in the U.S. after a brief rise in reaction to the news. Since October 4th, when we called the stock rally, it seems to me that the market, which had been priced for a European catastrophe, began to reprice itself for something more like what we have just seen. All of which is to say, we are probably pretty fairly valued at the moment, and it’s likely we will see volatility contract and a return to a more normal trading pattern for a while.

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Quick Technical Update

A quick update before the market opens:

1. The SPX came back to the break out point yesterday. We could see a further drop; a .382 Fibonacci retracement of the move off the Oct 4th bottom would bring us to 1182, roughly where the 50 DMA now sits.

2. The CRB has hit the 50 DMA and backed off as of this writing.

3. WTI spot price hit the 200 DMA on the nose.

Of course all eyes are on the situation in Europe where, in typical fashion, there is not enough clarity on any resolution to the debt crisis. However, they seem to be moving into a tighter range on a Greek bond haircut number. How this is handled will have a big impact on the markets.

At this point I believe something like a 60% haircut for Greek paper has been priced in, so anything up to that point will be welcomed as positive by the market. Anything beyond that, including a Greek exit from the euro, will be problematic. The Italian situation will also have high impact. That is just my read.

Looking for Stocks to Take a Breather

The S&P 500 reached the top of its range yesterday at 1220, before selling off at the end of the trading session. My read is that the bounce we called early last week is likely to give back some ground. Whether it’s a consolidating pause in a larger move up, which I still believe is a good possibility, might be proven by the 50 day MA at 1173. If it breaks, then I will be looking for support at the bottom of the range, around 1125.

We have done some buying over the last week, and look to do more during the consolidation…providing, of course, we don’t see an acceleration to the downside. If we clear October without any unpleasant surprises, we will be heading into a time of year that is commonly good for stocks. However, looking at a long term chart, there are some technical headwinds we need to keep in mind:

Looking for a Bounce

It’s been a while since we’ve had a post in this space, with the weekly analysis moved over to Seeking Alpha, but we have a technical development in the stock market that merits mention. It looks like we have a reversal this morning on the major indexes which, combined with extremely oversold conditions, gives us a decent probability of a stock rally.

There is a really long tailed hammer on the two most popular junk bond ETFs (HYG and JNK), which also is a positive signal for longs.

I am not calling a bottom here, just a bounce. The market will tell us whether it’s putting in a bottom in the course of time. A quick in/out long side trade may work out well. Some longer term bargain buying may also work.

Disclosure – we are long HYG in the income portfolio.

Post-Fed Musings

The Fed confirmed today what was already tipped – it will extend the maturity of its holdings and continue to buy mortgage debt. The bond market was delighted, the commodity and equity markets, not so much. A few thoughts on the reaction:

With the Fed program so widely anticipated, I thought the long bond had pretty much priced it in. Wrong. The yield plunged to 3.039%. A 2 handle is pretty much a foregone conclusion; when you get this close to a round number it sucks the market in. The 10 year yield is now sub 1.9%. Amazing.

The Dow transports were off more than 5%. You don’t often see 5% daily moves on the transports – in either direction.

The small caps, several large cap sectors, and quite a few blue chip stocks broke down out of the bear flag patterns we described a couple of weeks ago.

Several foreign market ETFs made new year to date lows on a closing basis.

My regular readers know I am one of those stubbornly optimistic types – we’re still in that range on the SPX that we outlined a month ago, and the NDX is still above the June low and the 50 day – but it’s getting increasingly difficult to find cause for optimism. We’re heavily overweight cash and eager to come off the sidelines. Not giving up hope yet, but I put the warmup jacket back on; it doesn’t look like we’re getting in the game very soon.

Tuesday Aftermarket 9/20/2011

In last weekend’s article I was cautiously optimistic on equities based on a nice tech rally. This week we were looking for a continuation of the move to start legging into some equity positions. Monday’s stock market action was good enough, but bond yields were falling again, leading us to be cautious. Today we had a discouraging reversal in the market. Just before noon we were up nearly 30 points on the NDX, only to drop 42 points in afternoon and close near the daily low, with volume building as the market sold off. The small caps didn’t even see a morning rally – they were under pressure from the open.

We never got our buy orders in this week, and as it turns out it was a good thing. This kind of action shows how tough it is to operate in this market. The reversals in a couple of leading techs like Apple and Amazon were particularly sharp. This is certainly a setback; now we’re back to waiting on the sidelines a little longer.

Tuesday Aftermarket, 9/6/2011

A quick note on today’s stock market action. The market opened gap down, as expected, on all of the overseas selling of the last two days, but the low of the day came at the open. It was mostly up from there, with a nice surge on strong volume in the last half hour of trading. We had several recent market leaders post gains in the 2-3% range: AAPL, GMCR, NFLX, AMZN, LULU.

I wouldn’t be calling a screaming buy just yet, because there is still too much uncertainty and the banks are in real trouble, but it’s more evidence that the unreserved bearish commentary we are seeing is overdone. As I have been writing in my weekly articles, we’re in a new trading range and could break out in either direction. I still think it’s just as possible that the market is building a base for a new rally, as it is that we will see a collapse.

We don’t tell the market what is should be doing, we let the market tell us what it wants to do, and position accordingly.