Saturday, November 12, 2011
As we write the Prime Minister of Italy Silvio Berlusconi has resigned. Mario Monti will now try to implement the package of economic reforms approved on Saturday’s vote. This is the good news the market was anticipating. In Greece the arrival of Papademos is also seen as the right choice. So we now have two highly anticipated changes at the top of two of the worse debt troubled nations in the Eurozone. Friday saw a 2% Veterans Day rally on very light volume. This news is expected to fuel that move with increasing volume until reality once again raises its hideous head and the market realizes that demographics and credit contraction are just forces too strong too overcome with just hope.
Market Behavioral Analysis
The equity markets have once again begun discounting a positive resolution to the European debt problems. This weekend’s news should add fuel to this hope and we anticipate equity markets extending recent gains up to highs last seen in July. We need to see confirmation by the S&P powering through its 200 day MA and the DAX surpassing its Pivot at 6060 early next week. Meanwhile, credit markets in Europe, excluding German Bund, need to firm up quickly if this rally is to have legs. The chart below of the US Treasury 30 year auction is confirmation that some of the “risk off” trade is beginning to diminish as traders see less need to hide out in Treasuries. Investors seem ready to sigh a great big relief rally. Let’s enjoy it while it last.
The S&P is still trapped in a range between the ExP 200 day MA and the Pivot as news from Europe vacillates between problem solved and default. With news of the changes at the top of two of the worse debt burdened nations this weekend we anticipate a celebratory rally and short covering to push through the MA at 1275 and some real buying to enter the market and a run in the S&P to 1350. We now feel that enough time has elapsed and that market participants have had time to consider contagion to France and will now begin to discount colossal printing by both the ECB and Fed. We will establish longs on a move above 1275 with a target of 1350 Pivot Top 1.
As Italian Bonds sped through 7% and the spread between German Bund grew above the 450 basis point of no return we expected US Treasuries to have benefited as the sole financial safe haven and rally to the Pivot Top Band of @144’15 where we would establish initial shorts. However, the rally that ensued was not strong and never reached our target. There may be several reasons Bonds did not rally as strong as we anticipated. A horrible 30 year auction (results above) and Oil on a quite rampage to $100 may be among them. We want to be short this market and will use any move above 141’16 or below 140 to establish shorts. First target is the Pivot now at 136.
We are short EC @ 1.4040. We have already given back the majority of our gains on this trade and expect to give up some more as this weekends news puts some hot air under the Euro. This “good news” rally will be short lived as the realization that the austerity needed and the printing necessary to save the Euro will drive the price to our first target of 13004.
We are long Crude from $89. Crude is well on its way to our $102 target, Pick any of the following reasons: Fiat Printing, Resolution of Debt Crisis, Mid-East Conflict, and the laughter, better unemployment numbers. Regardless we expect to take profits on the first touch of Pivot Top 1 at $102.
Our long has been established at 3.2220. Copper has broken the breakout of the W bottom. This throws the chart into some discord. We will remain long looking for a move to the Pivot of 3.8600. Hopefully, the news from Europe this weekend will help this market reestablish the positive breakout. If not it does not bode well for the celebratory rally we anticipate early next week.