Solid Intraday Action in Anticipation of a European Deal
- Stock market is putting in constructive sessions ahead of EU meeting.
- ECB providing an extended, 2 year loan facility, reports have G20 putting up $600B for IMF Europe fund. France promises a ‘powerful’ deal. Promises, promises.
- Germans less confident of a deal, S&P goes all in, putting EU itself and EU banks on negative credit watch.
- After 235 years we are told our system does not work.
- Many stocks working on new setups, but of course they are relying on some form of real deal from Europe.
Solid intraday action in anticipation of a European deal.
Wednesday was another constructive session in the stock market with the same themes driving the action. Of course those themes would be the news stories out of Europe. It was once again a quiet day on the economic front for the U.S., so all eyes turned across the Atlantic to see what was coming out of the ECB, the EU, the IMF, and any other agency that you can think of. We will take any scrap of information, and that was indeed the case late in the day. Rumor came from Japan that the G20 was putting together $600B to dole out to Europe through the IMF. How quaint is that? That was good for a few points as well. Even though the IMF later denied it, it helped the markets move to the upside late in the day.
This goes along with the underlying idea, and the bid below this market, that there will be more and more stimulus heading Europe’s way. It all started with the announcement from the five central banks that they would make dollars easier to come by for the EU banks. When that came out, the stock market rallied. We figured there would be more and more facilities and aid heading to Europe. That is exactly what happened. It is nothing huge, but there is a steady stream of news. Today was the denied report of the $600B, but there was also a lot of other news out of the continent.
First of all, the S&P was on the negative side of the ledger. It put the EU itself on negative credit watch along with the EU regional banks. Who knows what will happen next from the S&P? It seems to be going after just about everything. Again, maybe it is part of a coordinated plan out of the administration in order to get the administration off of S&P’s back ahead of Geithner’s trip and the summit this week. They are putting pressure on Europe, no doubt. They also have these other facilities being announced in order to help the situation along.
Early in the session, the ECB announced that there would be 2 year loans to ECB banks. The reason being is typically that they are shorter term. But in order for the banks get their balance sheets in line, they are allowing longer-term loans. There are also plans for loosening the collateral criteria with respect to loans so they can have money more readily available. That was a big help, but then an unnamed German official said he was “less confident” that an agreement to be reached. Leave it to the Germans to act as a downer. In the morning, the futures were reflecting more of the downbeat aspect versus the upbeat of continued flow of facilities to Europe. Believe me, these are all just precursors to more of a “bazooka” type of action with some sort of Quantitative Easing to be announced.
Futures were low. While not crashing, they headed lower into the open and the early trade on the indices. But there was a turn. As you will see with NASDAQ, it was an interesting turn and a rebound into the afternoon. And there was that assist later in the day from that Japanese report about the $600B booster through the IMF. That helped the markets rally nicely, not to mention the typical afternoon leveraged-ETF push to the upside.
Once again, we see the positive action. That good old low-to-high action that is an indication of a relatively healthy market. Nice rally on the introduction of new European stimulus. A lateral move in a relatively tight range. Reaching lower intraday and recovering on Monday. Doing the same thing on Wednesday, although it did not gap to the downside; it just sold off and reversed. That is constructive action. You can see the buyers actually coming into the market when they had a chance mid-morning and driving things higher.
I talked several weeks ago about funds chasing performance into the end of the year. It looks like they are doing that now. But here is the caveat: everything is hinged on what is coming out of Europe. Right now the stock market in the U.S. is digesting the nice gains from last week. Big rally, holding the gains. That is very solid. Good, constructive intraday action. Decent leadership setting up for continued moves to the upside. But all of this is premised on Europe doing the right thing. Once again, we are setting up and waiting for Europe to do something.
One French official said there would be a “powerful deal” coming out of this meeting. In that case everyone will be happy, but expectations are one heck of a thing to manage. It did not help that the French minister said there would be a powerful deal because now expectations are higher. The market is holding some nice gains in anticipation of a deal. We have to see it come. I am not sure if it will happen. But the markets are reading it in. As long as the market reads it in, you pretty much have to follow where the market is leading. Stocks are setting up and the indices are refusing to give up their gains. It looks as if the funds are trying to buy into the end of the year. That is keeping the bid under the market in conjunction with the European bid.
The intraday action was constructive. The futures were modestly lower. There was a selloff into mid-morning and then a recovery to positive in the indices. All except NASDAQ. It was not a big move, although it was not a bad move in terms of consolidating the gains.
SP500, +0.2%; NASDAQ, -0.01%; Dow, +0.38%; SP600 +0.08%; SOX, +1.18%.
If the semiconductors can come to life and lead, that is great. It was not any major move, but that was not the point. It was not the stock move that we were interested in, it was the action on the indices. They continued that nice low-to-high action, rebounding off the lows and setting up a consolidation for a new move higher if they can get the deal they are looking for out of Europe.
THURSDAY
On Thursday we have the usual. Initial Jobless Claims are expected to come back down to 395K. Wholesale Inventories are expected to rise. You would look forward to that as the holiday season comes into full swing.
With respect to the market, I have been talking about leadership and the waves that are trying to come up and support this consolidation and drive the indices to the next higher range. A lot of eyes are focused on what will happen in Europe. Obviously the meeting will be the key. Can they come away with a meaningful agreement? The last five times they have tried, they have come away with less-than-meaningful agreements. Not really even a piece of paper worth reading. But there is a difference this time. We have new leaders over there, and we also have a new attitude with respect to inflation versus liquidity. It seems like they want to go the U.S. route of liquidity, and that is a sea change. Even the doubters have to acknowledge that. I am a doubter with respect to Europe, but I think they have crossed that bridge.
The bid remains, and thus we can see constructive action in our markets and elsewhere. We have been using that to take some positions. We continue to see some new leadership develop, and that gives us opportunities as well. As they show their moves, we can take positions in those. The market has a bid. We will have to see if Europe can deliver. If it fails to, all this could be washed away. But that is just a risk you have to take. One thing that is so frustrating about this market is that it is driven so much by external forces and political decisions. But this political decision to liquefy Europe could help the stock markets around the world.
We are trying to make extra money off of the stock market and assist you with your income and help you with that deflating dollar. We need more of those dollars in our pockets. If the powers that be are going to pump money into the system and increase the apparent value of financial instruments, we will go along for the ride.
Stock Splits & IH Alerts, Editor
InvestmentHouse.com
