Bulls Ride a Hot Euro
The market rose a little bit more yesterday and volume picked up a tad too. The higher volume is easily explained by the boat crash and earnings season. Shares of Carnival (NYSE: CCL) saw a huge jump in volume following the crash over the weekend and big banks such as Citi (NYSE: C) and Wells Fargo (NYSE: WFC) also saw an increase in volume after earnings.
The remaining additional volume likely came from sellers at the 1301 resistance zone. The 1301 area is formidable resistance and it will take positive economic or financial data to break through it. The bulls tried, unsuccessfully, to break it yesterday riding a weakened currency. But SPX will need more than a slight decline in the dollar to stay beyond 1301 for any period of time.
With weak earnings from the banks and minimal economic data to embrace, I took a bearish position yesterday. The trade by no means makes me bearish, but absent of any positive news I found it hard to believe resistance at 1301 would break. And since basic materials was one of the worst performing groups last year, if the market does pull back at 1301 that sector should be hit the hardest.
In the near term, a brief move to 1332 is still on the table if the euro continues to climb. Additionally, any positive earnings today from banks such as the Bank of NYMellon (NYSE: BK) or Goldman Sachs (NYSE: GS) could also shoot the market higher.
The market managed to increase yesterday without the support of bank stocks. But I don't think it can persistently climb higher while its leading sector (financials) underperforms.
The bulls need the banks to turn yesterday's loss around and post gains today. Otherwise, a lot of pressure will be placed on the technology sector to support the bullish trend. And increased costs along with weakened corporate spending could spell trouble for technology stocks this season.
We'll find out about the health of the technology industry soon enough. Technology earnings start tomorrow with IBM (NYSE: IBM), Google (Nasdaq: GOOG), Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) all reporting. Speaking of Google, today it has joined with Wikipedia to protest the Stop Online Piracy Act and the Protect IP Act. The two plans could allow the Justice Department authority to force search engines to leave out specific search results (this is what China does).
Today, Wikipedia closed its site down to raise awareness about our potential policy changes. The rules are being unfairly shaped by Hollywood, which has Congress in their pocket. I would encourage people to read more about the issue that threatens free press in the U.S.
U.S. futures point to a higher start this morning, but once again, I think it's the result of the rally in the euro. At $1.28 the euro only has $0.02 to go before it smacks $1.30 resistance. Unless drastic policy decisions are made in the EU, the bounce from the euro will be short-lived and so will any equity rally that is based on it. Additionally, let's also pay close attention to natural gas, which has gotten slaughtered over the past month. But a tradable low is likely near.
Do you think the euro will rally? Please drop me a line sometime today at marketforecast@wyattresearch.com.
