The Euro Will Need to Rebound
The market started to plunge yesterday, but just after lunchtime, out of nowhere, the bulls roared back. The indices went from moderate decline to flat within an hour. And by the close the bulls had the bears on the ropes and took the indices nearly another percent higher into the close.
Volume was noticeably weak again yesterday. But the bulls took back 1250 and that was an important thing to do. So long as the bulls keep 1250, SPX should not only challenge the 1292 high from October, but SPX should elevate to previous highs near 1350.
And should that ascent unfold, I doubt it will be as rapid as the October bull rush. The climb will likely have a few big surges, but for the most part, it will be gradual.
The bulls did their part yesterday, which as I mentioned in the morning was to avoid a loss on the session Monday, and so I will favor them in trade.
But my big concern about getting too bullish now goes back to the three things I am looking for during this rally: strength of small cap stocks, inline performance of banks and for a decline to the dollar. In order to maintain a strong bullish rally, two of the three conditions need to be met.
Yesterday, the banks finished higher but slightly below the market. The small caps finished the day lower, which is way worse than outperforming the other indices. The dollar finished slightly lower, by 0.09%, so not really a huge decline.
The miniscule movement from the dollar and banks can be forgiven as just a day to day fluctuation so long as both trend in the desired direction over this week. But the underperformance of small caps (technology stocks too) gave me bigger pause.
If two of my three requirements cannot be established (clearly) over the next few sessions, we should be looking for a top. But for now I will respect the breakout past 1250 yesterday and look to add long positions when I see an opportunity to buy.
If the dollar falls, that likely means the euro rose, which is great for solar stocks, dry bulk shippers too. Both of those industries derive a large portion of foreign currency sales in euro, so the higher euro currency exchange rate bleeds right into bottom lines. As opposed to a forex trade on the euro, foreign stocks that benefit from a better currency exchange may be better options to most traders.
I didn't mention it yesterday, but this week is very light in economic news. Also, earnings season is winding down. The ordeals in Europe would have taken the spotlight from economic or earnings announcements anyway, but the focus on Europe will be more pronounced this week.
One big number to monitor is the yield on Italian bonds. Yesterday the yield rose to 6.6%, which is 0.4% away from the panic number. Another quick rise in yield could get the bears back into Europe, which sinks bank stocks and euro, overnight. Additionally, the EFSF bond issue yesterday stunk. Ten year rates (AAA) sold for 3.59%, which given the high ranking bond status, is high.
The United States, which is also "AAA" ranked, sells its ten year note for 2.06%. While comparing the two prices is not apples to apples, it goes to show the disparity of yesterday's auction.
