Stress Test Results Revealed
The market finished the week ending up one percent in a strong close today. Volume was average and advancers edged the decliners by 4 to 1. Optimism in today's session stemmed from presumably better than expected results from Europe's stress tests. Only seven banks would not survive a worst case scenario. Although that may be better than expected, do the results even matter.
You may remember when the U.S. Treasury conducted stress tests on U.S. banks. Last year the U.S. tested banks using two scenarios, growth and no growth. The conditions that Geithner & Co. laid out for the banks were absurdly easy to pass. It was pretty obvious at the time that the stress tests were not meant to really test the banks, but rather, to instill some confidence in the marketplace. Considering the worst scenario from the U.S. tests became a reality, and no U.S. banks have failed (big banks), should Europe's results matter.
Yes, but not for the banks.
Today I advised readers of my TradeMaster Daily Stock Alerts' to pay closer attention to the euro's, and later, the ECB reaction to the stress tests - not the banks. The results will almost certainly impact the euro, which is trading in an bullish upward channel. The results will either crash the euro and take it out of its bullish channel, or gap the euro higher to challenge $1.36. The real move will probably come Monday once Europe opens again, but for now I remain strongly bullish the euro - and have been since early May. The rising euro is a critical factor in the rise of the U.S. market. A falling dollar (higher euro) tends to raise equities. Continued momentum for the euro argues strongly for a continued rally in the market.
Also, President Trichet, whom I didn't like until now, is on a campaign to tighten monetary policy. He urged the European Central Bank to be prepared to reign in liquidity, like China/Australia, and battle inflation if the European economy turns out to be stronger than expected. Since "European economy" is just another term for "European banks", and the bank's stress tests results were better than experts projected, the central bank could tighten policy. While I like the EU's concern for inflation, tightening would not be the right decision this year.
The Chart of the Day
Central Distribution (Nasdaq: CEDC)
(CHART) could be on the verge of a bullish breakout.
We have taken a look at this stock before in my weekend videos for
subscribers. In June I was negative on the stock and expecting lower lows.
Now, volume has increased and in early June shares made a huge pop higher to
trade near $27 resistance. After breaking out of a bull flag last week,
shares could be preparing to take out resistance and make a move towards
$31.
The stock certainly has volume on its side, which has increased steadily
alongside price over the past two months. That shows buyers are interested in
owning shares in the $24 area. More importantly, will be the volume as shares
make a break past $27. If it's on high volume, the stock has very likely made
a long-term bottom last month. Fundamentally, the stock is cheap at 12 times
EPS estimates and operates in a recession proof and emerging industry. In the
near term shares will target $31, my secondary target takes shares beyond
$40.
Watch List
The TradeMaster watch list was mostly higher today,
similar to the market.
Leading the way higher were small cap China stocks Telestone
(Nasdaq:TSTC) up 10%, Tri Tech (Nasdaq:TRIT) up 7% RINO (Nasdaq:RINO) and
Netlist (Nasdaq:NLST) up 6%. The weekend video, which is only
available to subscribers will cover those charts in extensive detail. It was
a great week and the portfolio is long only heading into next week
trade.
