Bullish Resistance or Bearish Over Optimism?
A. FUNDAMENTALS WORRISOME
When the fundamental picture is characterized by threats galore,
a mixed earnings season, and the biggest hope is for short term
band aids from central banks, yet risk asset prices remain far
closer to their multi-year highs than lows, then the odds do not
favor taking new long positions in risk assets.
Yet most risk asset markets remain in multi week (or longer) up
First, we look at the fundamental picture.
1-4. EU Still The Focus, But Specifics Vary
Events related to the EU crisis and its threat of igniting a
wave of sovereign and banking system defaults remains the source
for the biggest market moving news.
For the coming week look out for:
Delayed Reaction To Draghi Disappointment
Despite his bold words over the past week, there was little real
action from Draghi, leaving markets waiting for the next ECB
meeting in December, unless events force quicker action.
Ongoing struggle between Germany and ECB
Germany and its allies continue to resist what ultimately
amounts to unlimited money printing, be it massive ECB purchases of
GIIPS bonds, debt forgiveness, bank bailouts, etc. The GIIPS,
France, and their allies in the ECB are more willing to gut the
EUR's value for the sake of keeping everyone solvent. The big risk
is that suddenly the EU can't act decisively when big cash is
needed and we get a new Lehman moment.
Italian and Spanish Bond Yields
Both remain unsustainably high and serious doubt that either
might not avoid default would be enough to ignite a new crisis and
send markets plunging, and no rescue funds available. The EFSF will
be nearly empty after the Spain bank bailout (it it happens) and
the ESM not likely to be operating or funded until sometime in
Delayed Reaction To Latest Greece Events
As noted in part 1, the ECB tossed its own rulebook aside in
order to prevent a Greek default in the coming weeks. Can it
continue to accept worthless collateral, and will markets stay calm
about contagion threat from a Greek default, until the Troika
reaches a decision in September on what to do with Greece?
Ultimately, one way or another, Greece will not be able to repay
what it owes. The only question is who gets stuck with the bill,
the banks or the taxpayers. Even if the banks get hit, many would
ultimately need taxpayer assistance to survive or to protect
depositors and prevent bank runs.
5. Delayed Reaction To US Jobs Reports
Markets loved them Friday, but on reflection they continue to
suggest that the US recovery remains weak and vulnerable to any one
of a number of potential shocks, ranging from a new EU crisis, the
fiscal cliff, and more.
6. Other Calendar Events
Top tier events that could move markets next week include:
US Fed Chairman Bernanke speaks
Australian rate statement, UK mfg production, US Fed Chairman
US 10 year bond auction
China: A batch of data on fixed asset investment, industrial
production, and inflation data that provide the latest gauge on
China trade balance
B. TECHNICAL: ONGOING UPWARD MOMENTUM DESPITE WEAK FUNDAMENTALS
PROVIDES SOME REASSURANCE
Global stocks and most other risk assets closed positive this
week, and some, like oil, moved sharply higher. While some say that
markets are too optimistic, others suggest this resilience in the
face of so many threats suggests resilience that limits downside in
all but the direst scenarios.
Certainly, low yields on investment grade bonds may have served
to force many yield seekers into stocks. That can help as long as
fear remains low enough for investors to value and additional
percentage point or two above protection from a sudden 5%-15%
capital loss if markets make a fear driven pullback based on the
assorted threats from the EU, global slowdown, US fiscal cliff,
The Best Place To Be In Times of Fear
Quality bonds barely pay anything. Money market returns are
Stocks? Spain and Italy have banned at least some kinds of short
selling, and the US has done so as well in recent years and could
easily do so again "for the sake of market stability." Meanwhile
the big boys have their ways of circumventing those rules while the
little guy gets locked out of some of the easiest to play trends of
So if you need to hedge long risk asset positions or want to
profit from short ones, remember that there are never bans on short
selling in forex, nor any complex uptick rules to navigate.
Despite its high risk and high leverage reputation, there are
numerous ways to ride the strong trends generated by market
pullbacks and crises, with no more risk or complication involved
than with buying ETFs.
While we remain in a secular bear market, having some exposure
to currency markets is a no-brainer. You just have to know which
methods are suitable for your preferred level of risk and
simplicity vs. potential reward.
The Above Is For Informational Purposes Only, Responsibility For
All Trading Decisions Lies Solely With The Reader.
Ascent Solar: Can It Ascend To Zagg Status?