You can tell a lot about now oversold a market is by how much it takes to create a bounce.
The explanations for today’s rally that I’m seeing cite the big surge in Chinese exports (For more on that news, see my post https://jubakpicks.com/2010/06/10/chinas-exports-soar-yay-but-so-do-housing-prices-groan/ ) and the good news out of Europe.
That’s not much to build a rally on. Especially because the news out of Europe isn’t so much good as “not too bad.”
To me the extent—global—and degree—2% on the Standard & Poor’s 500 and on the Dow Jones industrial Average as of 1:30 ET—of the rally indicate that financial markets were so deeply oversold that they were ready to bounce on even weak good news.
And that makes them especially vulnerable on the downside to any bad news—from, say, weak U.S. retail sales numbers tomorrow. (For more on the risk in those numbers see my post https://jubakpicks.com/2010/06/09/is-this-the-son-of-bounce/ )
The “not so bad” news from Europe that’s helping feed this bounce?
First, Jean-Claude Trichet, the head of the European Central Bank, said this morning that the bank will extend its offerings of unlimited cash of European Union banks and keep buying government bonds.
In other words, things are still so bad that the central bank is going to keep those emergency provisions in place to head off a descent into something even worse.
Oh, and the bank announced that it will keep its benchmark interest rate at 1%.
Second, Euro Zone governments avoided a complete train wreck and reached agreement to set up a $526 billion European Financial Stability Fund. The fund, part of the $1 trillion rescue package announced weeks ago, has been “funded” with guarantees from its Euro Zone governments. That will give the fund the ability to lend directly to governments that have been shut out of the financial markets because of their budget problems.
You know how little confidence the financial markets have in Europe’s political leaders when agreement on something that should have been certain to pass and where failure to agree carried clear disastrous consequences is greeted with a continent-wide cheer.
The cheers are likely to get a little less loud when investors get a chance to read the fine print.
The Stability Fund won’t lend until a country can’t sell its bonds at a yield of less than 5% or so. So far only Greece is in that sinking boat but Portugal isn’t far behind after yesterday’s bond sale. The fund will charge about 5% for its loans. (Greece currently pays 5.2% for loans of longer than three years under another $133 billion program.) In other words this isn’t cheap money and interest rates like these will make it harder for countries like Greece and Portugal to reduce their budget deficits without sending their economies into recession.
Another wrinkle: when a country has to turn to the fund for help, it can no longer act as part of the group providing guarantees to the fund. That’s an absolute necessity if the Stability Fund is to get the kind of AAA credit rating it needs to act as a backstop to individual governments at a reasonable cost.
But that also means that each country that has to drop out of the fund’s pool of guarantors reduces the funds lending capacity. The fund has been set up with guarantees from member governments equal to 120% of its $526 billion lending cap. If Portugal, Spain, and Ireland all turned to the fund to borrow that would wipe out the 20% cushion at the fund. Any requests beyond that would cause the fund’s lending capacity to sink extremely rapidly.
But those are all problems for another day.
Tomorrow perhaps.
nukeage,
Nah, just having fun. 🙂
Ed,
Like that bullfight metaphor. Feeling Spanish today?
Today’s rally seems to be a result of EUR/JPY becoming stronger. The S&P futures (/ES) are in perfect correlation to EUR/JPY.
No matter what the news, low volume tends to bring higher highs and higher volumes are bringing lower lows.
bobisgreen,
If you’re talking about some beef rib barbecue, that’d be just “bully”! 🙂
Ed,
If it’s made with splenda…Nothing comes to mind with “bull” for breakfast. Of course, an old fashion bar-b-que later in the day, say after the markets close comes to mind! Your favorite sauce?…don’t say bear-something-or-other.
Retail sales report due tomorrow morning at 8:30 am.
Bear claws for breakfast anyone? 🙂
wb.3355
Yep…very light…waiting for the shoe to fall. As Ed would say, look up quick…here it comes.
Capitulate the other direction and “buy baby buy”…What a relief to see “green” flash on the screen this afternoon.
Friday…another day.
The volume in this bounce is very light, you may want to look out for the coming drop.
LOL!
I think the problem is these Gap ups aren’t good for the market. The steady 1-2% is much better.
grindy2424,
If you’re going to be there for awhile, save your dollars. They’ll buy even more soon! 😉
I don’t have a stop on SPXU yet. Actually, if the markets keep rising, then I’ll be adding SDOW and SQQQ.
I do have a stop on EPV at $25.
For the record I’m trying to stay optimistic….. But even with Logic and looking like we could see things recovering by late this year the next 3-6 months is rough.
On a good note I don’t live in the US right now so a strong dollar is buying quite a bit in Europe!
Ed,
Sorry EFZ. Support is around 63.
SPXU. You put a stop in here?
Agreed we are probably seeing this go a bear (we still are in a bear from 2007-2008).
bobisgreen,
It’s good to see a bull with some spunk! I hate it when the bulls just roll over and die. 🙂
Ed,
2:15 PM? Check! Nastydeq 36
S&P 21
Ed,
2:10 PM? Check! 184 (Dow)
Bull Horns sharpened? Check!
Bears, you’re out of time.
Haven’t bought anything for the occasion!
grindy2424,
You have a short on EFV? But EFV is at around $43. Or are you talking about a long option?
Jim,
Enjoy your bounce. This is in all probability a bear market, as history shows:
http://online.barrons.com/article/SB127605459202003151.html?mod=BOL_hpp_dc
2 pm? Check…
Bear claws sharpened? Check…
Bulls, you have 15 minutes. Then the smackdown begins!
P.S. I even picked up some SPXU for the occasion!
Ed,
Read through your post and you are right on with UUP needing to weaken for the stock market to go up. I think what you are seeing is if UUP goes down people are going more for the risk trade in commodities and emerging markets. A little bit of a beta chase.
Something I picked up with the export numbers as a widening gap (part from euro crash) should in theory help the Euro find support here short term. Possibly some strengthening but nothing past 1.23 IMO. Market could rally if there is stabilization here even I think.
I have the EFV short open with 50% stop at 61.50 and the rest at 60.15. To get to these levels we would see a huge breakthrough on the S&P. Still light volume so no reason to believe it will stick (bears may come back this afternoon anyways).