European Debt Contagion Remains
Richard Rhodes | Jul 27, 2012 01:38AM ET
STOCKS:
The European debt contagion remains front and center. Spain and Italy bond yields are high and rising once again even after the EU Summit produced a vague pan-European banking supervisor and other ways to lower periperhal European bond yields. It did provide for a respite to lower stock prices; but yields are rising again...bearishly. Also, China remains on a growth deceleration curve, with growing concerns of a very hard landing — various estimates are centering in on the 7.0% level and even lower.
STRATEGY: The S&P 500 remains above long-term support at the 160- wma at 1206; which delineates bull/bear markets. However, the 200-dma support zone at 1266-to-1278 remains the bulls “Maginot Line”, while overhead resistance at 1340-to-1360 has also proven itself as resistance. We look upon yesterday’s weakness through S&P trendline support as being very bearish, with perhaps a sharp decline forthcoming.
WORLD MARKETS LOVE MR. DRAGHI THIS MORNING as his comments out of a London conference have turned markets that were rather modestly lower by - 0.5%...and have turned them higher by +1.0%...a turnaround off the lows of +1.5%. His comments were the latest in a string regarding central banks – the first being yesterday’s WSJ article that US FOMC committee members were growing impatient with US growth and employment. This morning, ECB President Mr. Draghi said that the ECB stands ready to do whatever it takes to preserve the Euro.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough.”
Quite simply, he reiterated what many European officials have said over the past several years as they have dithered along. Certainly this is a bit of jawboning on his part; and we are certain that the markets shall take Mr. Draghi to task by pushing the ECB to act sooner rather than later. The ECB already owns an enormous amount of debt from Greece, Spain and Italy – and they have two LTRO’s outstanding to the tune of €2.0 trillion. Remember, the ECB has sterilized all of their bond buying; and their balance sheet is already larger than the Fed’s. We don’t find anything new in his comments; but the market’s reaction to QE talk by central bankers strikes a “frenzy nerve” and the immediate reactions are always positive. However, we’ll be interested to see how the markets trade throughout the day. And another note…he has taken the focus off of Greece and their likely exit from the Euro-zone. Citibank today stated they were giving it a 90% probability by January 1, 2013.
Get The News You Want
Yesterday, the WSJ article regarding FOMC committee members being impatient stoked stock prices higher initially; but then we saw them drop rather precipitously before regaining their footing. However, only the Dow Industrials and Russell 2000 closed higher. The other indices closed lower. Hmmm…QE rumors by Fed members and the markets don’t go higher?! Even the advance/decline.
and advancing volume/declining volume figures were punk. We’ll be watching carefully for a “failure” to develop today or tomorrow after Mr. Draghi’s comments; which would be a rather marked change in the manner the markets handle QE talk and banter.
TRADING STRATEGY: On Tuesday, the S&P broke below trendline support – which is bearish; thus we exited our long positions. Moreover, the current pattern is similar in nature to that of June-July 2011 – with the breakdown leading initially to volatility, but then a decline of nearly - 18%. Given today’s pattern “rhymes” with 2011, we’ve added a “starter” short position in the Russell 2000 via the inverse ETF (TWM). We’ll look to do more soon, but we’ll wait for Tuesday’s S&P futures lows are taken out at 1321.75 before considering doing so. And, we’ll look at shorting the Emerging Market via EEV.
Now, as this correction develops – it will simply push those areas such as Energy and Healthcare lower to levels that are more attractive than they are today. We expect them to outperform during any decline, but they cannot withstand the type of selling onslaught that appears to be developing.
Lastly, on Mr. Draghi’s comments – we find gold futures higher by +$11/oz to $1611. As noted in many previous letters, we are simply watching and waiting for gold futures to breakout and hold above the $1645 level before looking to be long either gold or silver…and in particular their stocks. One stock we are watching carefully is Pan American Silver (PAAS), which has declined precipitously from $43 in April of 2011 to $14 today. This is back to 2003/2008 levels. At some point, this will represent a rather “good value.”
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