As had become the belief late last week, the coalition of 2 Greek parties willing to work within the EU parameters (although they would like easier terms) took enough share of the election results yesterday (assuming they will work together) to provide relief to world markets. Futures were up a bit over half a percent last evening, but that short term euphoria has dissipated this morning. While on the surface this looks identical to what happened 2 weeks ago when there was a Spanish bank rescue announced, which the market promptly sold off on the following Monday I'd argue there is some difference. If you recall last Thursday we saw markets up sharply even ahead of the leakage at 3 PM of 'central bank intervention' if need be post Greek elections. Then Friday we saw another strong day, so I'd say those 2 days were actually the Greek election rally. Hence this is more of a buy the rumor, sell the news reaction. Further, Spanish yields continue to blow out – now over 7.1% with no solution in sight. What had been curious last week is even as we had the rally late in the week yields had not fallen in the Eurozone while U.S. Treasuries continued to get a bid. Hence it is still difficult to 'trust' what the equity markets are showing.
That said let's go to the technicals, which are increasingly difficult to rely on when we are in such a headline driven market. On June 6th I posted this chart which said the S&P 500 (and many other charts for that matter) had the potential of forming a bullish "inverse head and shoulders pattern" if the next 7-8 sessions could build out with sideways action. Exact quote was:
If you are in the technical analysis 201 class, you might also make the case if the market can just go sideways/a tad more up for say 7-8 days a bullish inverse head and shoulder formation could just be beginning to form (head formed on that spike down Friday).
Here is the "theoretical" chart I posted that day:
Up through Thursday of last week we had that right shoulder form over 6 sessions, and then on the 7th (Friday) we had the 'breakout' if you will, over the key 1340 level.
So the coast is clear right? Well of course in this hectic environment nothing is going to be simple or easy. If the market comes back in this morning and falls below the upper 1330s there is a chance Friday was only a headfake. Looking farther out the lows of last week in the 1305 area would be important to hold to keep a constructive view on the general market. Also please note – while not visible on this chart – there is a gap at the 1295 area and those index gaps normally fill within 2-4 months if not earlier.
This week there is a G20 meeting where it appears the only plan they have is to increase the European firewall a bit. And all eyes are on the FOMC meeting. Unfortunately it appears the consensus is that Operation Twist will be extended, which means the chance of disappointment increases as "action" is now generally expected. So as usual expect whippy action Wednesday afternoon. And until these U.S. bonds act more healthy, and European yields relax it is difficult to trust the equity market. One positive is Friday was the first day in a few months we had a solid number of "growthy" stocks breakout. We need to see this behavior to sustain – where stocks actually move on their own fundamentals rather in a 'student body left' environment where almost every stock moves en masse with the market. If nothing else, this shows us a group of names that could be the leaders on the next move up – whenever that happens.
Economically, it is a quiet week with some housing data and a new flash ISM estimate by Markit (Thursday), which will be interesting to watch if it has an impact on markets. They only have rolled out this report last month, although it's been around for a long time for the PMI data in Europe.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog