The Dollar Rise May Halt the Bullish Rally
The market concluded its fourth positive week in a row with another strong performance from financials.
The big move in the market was mostly due to bailout details outlined by the EU. Although most of those details lack exact timeframes, there are numbers behind them. And the 50% loss bondholders are set to take was welcome news to the market.
The bailout news helped spark a big rally in financial stocks, which were up 6.5% last week. Big U.S. banks had an even nicer week: JPMorgan (NYSE: JPM) up 9.5%, Bank of America (NYSE: BAC) up 13.5% and Goldman (NYSE: GS) up 13.5%.
European leaders did what the U.S. Fed did in 2009; they stabilized the market. Bank stocks have had a dismal year. And while economic stagnation certainly helped push stocks lower, the uncertainty in the financial system in Europe was a bigger culprit.
But now that the EU stepped in (along with support from ECB, IMF and a host of third parties), and supported financial interests, banks stocks found a solid footing and should rally from here.
The jump in bank stocks brought SPX above 1250 for the first time since August. In fact, SPX managed to hit 1293 last week, but closed Friday at 1285.
Aside from the big rise from the banks, the indices were also boosted by a fall in the U.S. dollar. The dollar fell 2% last week, and is once again near its lows of the year. Although that fall from the dollar (and the corresponding good times for the stock market) may be short lived.
The Bank of Japan intervened with its currency over the weekend, which has resulted in a huge reversal. The Yen had made a new all time high last week. But the intervention has already reduced the value of the Yen by 4% overnight.
Additionally, European investors have started to sell the euro after its big rally last week. The combined currency reversals should result in a short term burst to the dollar. And any rise from the dollar will have an equal (if not greater) negative impact to stocks.
I still don't find it profitable for us to go short. While I think a pullback to 1250 is almost certain, SPX 1220 should be strong support.
Obviously if both of those levels fail, SPX, and the other U.S. indices have big problems. But until those support zones fail I will continue to have a bullish bias to trade.
