Last night, the futures were getting hammered because of Italy's downgrade. Interestingly enough, this morning a reversal took place, and we were trading much higher. We maintained the strength up until 2:30pm.
The strength in the face of EU negativity (Italy downgrade) highlights the divergence taking place between stocks and a potential crisis. It is evidence to me the market is no longer pricing in a 'credit crunch', as I highlighted in the past at much lower levels.
The market is chilling at the 1200-1220 level.
To me this is very significant from a technical perspective. This is the level that should have acted as long-term support for the rally that started in March 2009.
The support did not hold because of an avalanche of bad news, primarily the Standard and Poor's downgrade. That improper downgrade cause about a 100 point decline on the SP500 in 3-4 days due to forced selling. (It was due to mechanics of the market.) Then, literally days later, a EU driven credit fear was spreading, adding to the deline.
In my opinion, the SP500 has pretty much removed the discount of an EU driven credit freeze. I think the big boys finally got the message that the EU leadership (despite all their chaotic chatter) will not allow for a credit freeze to take place.
Now, the market is left with an artificially reduced multiple due to forced selling from the Standard and Poor's downgrade. However, the long-term trend is broken, so the majority of the big boys will have a 'wait and see' attitude for earnings season.
We have already seen signs of bullish behavior with leadership forming (ie AAPL, IBM and the semis). And there already has been action by emerging economies to ease instead of tighten. (Brazil, China)
All we need now, to change the negative perception by the big boys, is the SP500 to close above 1220. We get this, and attitudes begin to change. I thought we were going to get that this week. With the morning strength I thought we could test 1250 or the SP500's 62SMA. If we can not get action in the market, then it becomes a 'show-me' story, and with earnings coming up, we will get the story. Evidence to this is AAPL, IBM and others that moved hard. (Its not because of momentum, its because of real earnings with a strong story.)
In the mean time, I will maintain my hedge, via the FXE 138 dec puts, for when Greece finally re-structures its debt.
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