The One and Only Positive Thing from Wednesday's Collapse
The market tanked yesterday morning and then continued to decline in the afternoon. The decline was a little heavier than I would have anticipated and volume was higher than normal too.
Yesterday's large decline was the result of only one thing: the higher interest rate on Italian debt.
Rates on Italian yields have steadily risen over the past month, but now, investors believe rates will jump exponentially. The Italian debt situation is somewhat speculative, but once a certain threshold is crossed (7.01%) the chances of interest rates dropping back to normal amounts are slim.
After Greece, Portugal and Ireland lost that same interest rate threshold their yields continued to rise dramatically. And the rise in yield forced each of those countries to seek aide from the EU. Since Italy is larger than each of those three nations, investors fear that bailout costs will rise to a point that rescue won't be an option. And maybe the EU will be forced to breakup.
Last month, the EU formed the EFSF to help avoid a situation like yesterday. And for the month of October the strategy worked. Investors came back into bonds and stocks, and life was good again. During that time, when the market wasn't so frantic, my TradeMaster Daily Stock Alerts trading service also had a nice stretch of trades: wins of 13%, 9%, 13%, 20%, 13% and later 47%. The TradeMaster Daily Stock Alerts newsletter comes with a 30 day risk-free trial, so click here for more details.
Sadly, the EU stabilization plan fell apart on Wednesday. Investors fled the bond market and new lenders required higher rates. The yields on Italian debt crossed the must hold threshold which is exactly what the EU had wanted to avoid. And investors panicked just like they did when Greece, Portugal and Ireland had their rates pop.
While the decline on Wednesday could be the first stage of the major decline that bears are hoping for, I am still temporarily inclined to favor the bulls. Buyers have proven themselves remarkably resilient over the past few months. And it's been tough to bet against them.
Additionally, which is also the reason I went long yesterday, crude oil prices have stayed strong. The price per barrel of crude oil still trades above $90, and rebounded to $97 yesterday. Investors are not pricing in slow growth. If investors were anticipating slow growth crude oil would be below $90, probably below $80 too.
I am concerned that SPX 1250 was lost, but 1220 should be strong support. And then there is 1197 in case that 1220 support for SPX is lost. In total, a move to 1197 would only be another 3% from here, which is less than Wednesday's 3.7% one day drop. There should be a relief rally this morning, and if the bears are as strong as many think they are, 1250 would be unbreakable.
