Bears Assisted by Italy
The market turned slightly lower yesterday. And volume was also noticeably lower. The bears won the day, but they didn't do it with much gusto. The decline yesterday was fairly lethargic outside of strong selling in the banking industry. Also the bears were unable to break SPX below 1250 support.
The mess in Europe has been the driver of the market for nearly two months. First, it was the potential bailout news that took the market higher. And more recently it's been a mix of political jockeying and debt payment concerns that have taken the market lower.
Last week I discussed why the market is so focused on the 7.01% level for Italian bonds. In a nutshell, it becomes harder to obtain cheap financing and pay interest when rates are increasing.
Additionally, the 7.01% levels appears to be a threshold that once crossed results in continuously higher yields and ultimately additional financial assistance. The market is using Portugal, Ireland and Greece as evidence that this magical threshold either prevents or leads to default.
The concern over Italy and the Italian bonds has taken the euro lower. And generally speaking a weak euro is bad for the stock market.
So, over the past few weeks, the market has needed to fend off a perceived weak economic environment in Europe and a decrease to the euro. And while the market hasn't declined too much over that time, volatility increased and the day to day fluctuations have been stressful.
Despite the turmoil, I have stayed bullish. While that strategy hasn't worked too well over the past three volatile weeks, until the bears can convince me otherwise I will continue to view October as an important bottom. Additionally, the economy and corporate earnings have been fine.
While economic growth hasn't been eye-popping, the economy has continued to grow. Economic growth in the U.S. has been strong, and inflation hasn't been too high either. Also, growth in Asia has been okay, but inflation has also stabilized in the region, namely China.
The Chinese will provide new government stimulus and decrease lending rates to enhance growth if inflation can remain depressed. In fact, with oil at $98 and rising, despite a decline to other commodities, oil traders are likely pricing in some kind of Asian stimulus program.
Outside of the fundamental fuddy duddy statistics, the chart favors the bulls. I understand the news from Europe over the past few months has seemed dire. And I also grow tired of seeing our stops hit within days of making a new trade. But the bears haven't gained any momentum despite the uneasiness in Europe and heightened stock market volatility.
For an entire month SPX has been trapped between 1200 and 1292, with most of that time spent between 1225 and 1275. Everyone likes to believe that we're in this massive bear-trend and we should be short (or bearish) the market. But outside of a two day, 70 point drop, at the end of October, SPX has actually moved higher for this entire month. After a price advance from 1073 to 1292, the recent action looks like consolidation to me. It doesn't make it any easier to trade, but the downside is limited to a few percent until the bears can garner some momentum soon.
