EU Downgrade?
The market jolted higher to start the week, but by midday during Monday's session that 1.3% pop turned into a modest gain. A nice rally at the close, however, brought the bulls a much needed boost. And most indices finished about a percent higher despite the weak afternoon. SPX found support at 1250 too.
The big winners during the session yesterday were the bank stocks. The financial index has been on a tear for the past week. Some big winners from the big U.S. bank group were Goldman Sachs (NYSE: GS) up 3% and Citigroup (NYSE: C) up 6 percent for the day. Since last Friday the index is up an impressive 11.2% and continues to dominate other sectors.
Bank stocks, and the other indices for that matter, will have to overcome some heavy bearish news today. Last night a ratings agency attacked Europe again.
Standard and Poor's placed 15 eurozone countries on review for a downgrade. Typically, if a credit downgrade is coming, it will happen within three months of the initial warning, unless the rating agency specifically spells out a different timeline.
More notable than the Standard and Poor's threat was who the credit agency went after. Standard and Poor's decided to threaten all-star countries like Germany and even insinuated a double cut could come for France.
Normally, I would think the looming downgrade is a bigger deal. But after everything that has happened over the past few months, which includes a downgrade to the U.S. rating, would the EU downgrade really surprise anyone?
By now most investors realize that Europe is screwed. I even discussed this before in the article "How Much Does Italy Really Matter." But as a society, we are optimists. And as optimists, we will cling to the belief that a knight in shining armor (Merkel or Sarkozy) will come to the rescue.
I think it's also possible that Bennie and the Feds come to the assistance of Europe. American banks are recapitalized. So are English banks. While both domiciled bank institutions have some exposure to Europe, it would not impact them nearly to the extent of the European banks. And Bernanke's system of recapitalization has shown it "works."
Additionally, Sarkozy and Merkel appear to be "playing nice" once again. And this weekend leaders from the eurozone will meet to discuss their future. One important step the group could take, and investors will be looking for language that suggests it too, is to adjust the current treaty and redefine economic metrics that will be more enforceable.
I don't expect much from the market today. Not only is the news bearish this morning, but SPX is up against 1250 resistance and long overdue for a pullback. Last week I mentioned I expected a drop back to 1220, and I still believe that decline may occur. The bulls remain in control of the trend. And until the bears can rebuild their momentum, I will trade with a bullish bias.
Do you think the euro can survive 2012? We love to hear from you, email us at marketforecast@wyattresearch.com.
