Good Rumors Spark Rally in Europe
The market recovered as buyers supported the 1220 zone on SPX. Financials once again played leader - the big banks have produced incredible swings lately. In addition to financials, oil stocks also played a big role in yesterday's ascent and defense of 1220 support.
Despite the ability of the buyers to hold support, I was unimpressed with the bulls yesterday. The rally looked like a normal recovery from two bloodbath sessions - not a tradeable bottom.
Unfortunately, the charts are somewhat not relevant this week. The market is moving, once again, on rumors from Europe. I've covered the top in the morning alerts before, and it's also what most of the media is covering now too; the referendum vote could undo most of the progress made by the EU over the past month. And it could actually make things worse than they were before the bailout talks began in October.
As such, we have to be ready for anything, which makes trade difficult unless your investment timeframe is less than a day or more than a year. Right now there are four possible outcomes every morning. I have also listed how the market will react to each outcome.
Good news (referendum pulled, bailout approved) - market turns bullish and makes a new high.
Good rumor - market stabilizes, moves higher to 1250/1280.
No news - market moves lower, moderately, 1197/1155.
Bad news - market collapses, minimum 1155, potentially new 2011 lows.
With only two positions open, I clearly don't have much of a bias for which direction the market will take. But as mentioned in yesterday's trade alert, the market is likely to fall if no new news emerges. And that seemed to be the most likely scenario, yesterday.
Of course, as we've been accustomed to over the past month, a lot can change overnight. Socialist members in the government have revolted against prime minister Papandreou's plan for a national referendum. If Papandreou is overthrown and resigns, and the referendum is taken off the table, stocks (and the euro) will likely rise quickly.
In addition to the referendum disaster, the ECB has a chance to calm the market this morning. Today the ECB will decide the interest rate. The ECB wrongly chose to increase interest rates this year. And each time they raised the rate, I wrote about how that was not the correct maneuver. Then only a few months later they reversed that strategy. Additionally, the ECB is also likely to decrease rates during their next meeting in December, but they may surprise us today and lower rates from 1.5%, which the market would like to see.
The bulls will not have any help from Asia today where China PMI missed estimates and most indices declined. Europe had started the day with huge losses, but has since reversed and is positive by over a percent. The move in Europe is a strong reversal (bullish) but it would all fall apart if the bailout plan fails to emerge. Political risk continues to thrash the market, and volatility will be high until policymakers can develop a working solution to Europe's problems.
