Europe Does Not Allow Any Rest for the Market
- Europe does not allow any rest for the market, and stocks post nice price gains yet again.
- France and Germany vow to support banking recapitalization and give themselves three weeks to come up with a solution.
- Sentiment indicators remain extreme as surging short interest shows.
- ‘No recession for US’ say the headlines. Oh I feel better.
- Indices head to the upper reaches of the range, driven by negative sentiment, not volume.
No time for rest as Europe once again agrees to plan for a plan to rescue the Continent.
Friday stocks sold back after a solid Tuesday to Thursday run. Lighter volume, holding the 10 day EMA; overall good action. Another day or two of testing and the move would be ready to continue on up toward the top of the range.
In a world driven not by US earnings reports, however, the news of the day from Europe gets the top market moving billing. Monday it was the report of another ‘agreement’ between France and Germany, the EU’s two largest economies, that spurred stocks, giving them no time for the rest you would like them to have to give new, safe upside entry points. That is the market we have.
The news was another agreement, this time both countries saying they support recapitalize the banking industry. Was this not agreed to a couple of weeks ago? Why the need for another agreement? Oh, that’s right: they really never agree. They just make offhand comments that are interpreted as either favoring or disfavoring an action, and of late the commentary has grudgingly moved toward favoring. We are all told that these comments mean Europe is now taking seriously its crisis.
So much so the heads of those two great countries gave themselves until the G20 conference, just three weeks away, to come up with a new plan (a.k.a. agreement) on how to capitalize the banks. They have been working on this for close to three years. They want to accomplish in three weeks what they have been unable or unwilling to do in three years. Perhaps they want to cure a few diseases in the three weeks as well.
In any event, that was enough to jump stocks back to the upside after just one day’s rest. They gapped higher and rallied into the first hour. Then a long, flat lateral move into the last hour. Things got interesting as the indices then tailed off sharply, suggesting the move was topping out. SP500 was stalled by the 50 day EMA and NASDAQ fell short of 2550 resistance. That lasted for about 45 minutes. Then the bids renewed and then some. Stocks bolted past the session highs and put in new session highs on the close. So much for topping out.
The move left the indices in the upper end of their two month trading ranges with SP500 25 points off the 1220 level watched by so many. Solid gains of 3% or more. Volume was absent. That does not mean the move was false. It is a move inside the trading range and moves inside ranges don’t need volume. Breaks out of the range typically do to show the trend is breaking. Not always; sometimes the volume does not show up until the test of the break fails. In any event, low trade but strong gains as the negative sentiment and technical indicators of the past few weeks have their day in the gains.
NASDAQ 86.70, 3.50%
SP500 39.43, 3.41%
DJ30 330.06, 2.97%
SP600 4.25%
SOX 2.82%
TUESDAY
FOMC minutes from September are out in the afternoon. Nothing else is scheduled. That leaves Europe and earnings. Earnings kick off after the close with Alcoa. Europe? Who knows what comes out of the Continent overnight. Maybe France and Germany will let their true feelings out once again and dampen the agreement enthusiasm.
The European story has driven the move. Those ‘better’ vibes from Europe suggesting it is actually taking its problems seriously now. Now we start turning to earnings AND technical issues.
Note that last week I talked about how the market had sold, technical and sentiment indicators were at extremes, setting the market in position to bounce nicely ahead of earnings. It has done that and is now approaching the highs in the trading ranges just as earnings are set to commence. I posited that a bounce into earnings might not continue with earnings as results may not show the kind of increases enjoyed in the past two years. Economic expectations weak, the government not able to deliver anything that would actually stimulate economic growth, earnings perhaps softening.
In that scenario the market is set to fall. IF the economy could be construed to improve, the very negative sentiment would suggest a longer term move. It is hard to make that case with domestic companies in dire straits and the President’s export economy suffering because those that would buy our exports are suffering. Thus the move may run out at the top of the range.
We will see. It all is fancy talk until the market makes its move. Many energy stocks have bounced but are in position to stall and fall if the mileage gained on the European agreements hits the end of the road. We have plays on both sides of the ledger ready to go based upon how the market handles the range highs. A bit late to pick up a lot of upside, though there are still some very good plays in position to move higher, i.e. not extended at all. Of course that makes them laggards on this move so they either represent the next wave of stocks to break higher and carry stocks further upside, they go lone wolf and make their own tracks even if the market falls, or they fail to move and just wait until the next bounce in the range to try, try again.
We can play some of those if they look good enough but don’t load up. At the same time, watch the weak stocks and how they handle resistance. If they stall after all of this upside then they likely turn lower once more and provide us downside plays. Good rally to this point and nearing an inflection point. Let them set up, make the plays.
