Market Montage

It's been just over a week since the euphoria over Euro fix 19.0 came to light, but as we awake Spanish yields are back over 7% and Italian yields are over 6% – the same levels they were at before "the breakthrough" a week ago Thursday night.  Since zombies have become so popular in our culture, one can parallel the European mess to these creatures of the night – it just cannot be killed.  That said, the market recognizes each time push comes to shove, Germany relents – the main trick is figuring out which periods the market is calmed by this, and which periods the market forgets that.  Of course each "solution" thus far has been little more than papering over the structural issues, but at some point the end game comes.   …

It would be funny if it was not real money but at 3:14 PM Jon Hilsenrath (aka the Fed's mouthpiece at the WSJ) had a story put on the WSJ website about how QE3 is more probable now.  Since then the S&P 500 has reflexively rallied 6 points.

This has all jumped the shark by this point.

I mentioned a few weeks ago everything had become an "inverse" dollar trade. [Jun 22, 2012: All About the Dollar]  While that relationship lessened some during this week long rally, the dollar really did not falter much other than to fall back to the support of the 50 day moving average.  If this rally is to continue, based on the algo's, it appears we need dollar weakness.  A lack of a "new higher high" would also be nice but we're already getting darn close.  This "dollar must suck" trade was not necessarily so in the 'old days' but has become more of the rule in recent years, as the dollar has been a flight to safety trade.  Compared to a stock this move may not seem like much, but within the currency market the magnitude of this 2 day move is quite astonishing.  …

While the intermediate term action looks more promising technically after the "gap and go" late last week, it's still quite a volatile market.  The entire holiday week's rally just disappeared in this opening 15 minutes of trading this morning and we're back to the mid level seen on the huge gap up Friday.  That said, if we are in the throes of a sustainable move, action like today will help work off that major overbought condition I've been speaking of the past 2 sessions.  Individual stocks continue to act 'better' so that is heartening from the bulls aspect.

If we take a step back and ask "why" stocks are acting better it is a bit bemusing – there is literally nothing positive in the global economic macro picture – everything is based on the belief that central banking easing can change things, including asset prices.  But until that belief changes, you have to respect the herd.

I'd also point out a few more high profile warnings last night from the tech sector, Seagate (STX) among them.  The hope for the bulls here is expectations for the quarter have been ratcheted down enough so we get the "beat lowered expectations" game, but with the global slowdown spreading there is a lot of risk to guidance in Q3 and Q4 as well.  And lowered expectations mean lower profits – recall last quarter the only growth in the S&P 500 earnings came essentially from Apple and AIG.   So if growth flatlines, or recedes you have to count on multiple expansion.   We've seen a lot of earnings warnings the past 3-4 weeks, so I continue to believe this is going to be the most messy quarter since the earnings rebound began in latter 2009.