Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
A month ago this sort of broad downgrade rumor/news – inclusive of France no less – would have led to panic and heavy selling of any and all things not named Treasures as “risk off” took over. This morning we saw something very different. While there was broad selling a lot of companies (with good charts) held up. For someone like me, I love to see that, as risk on – risk off, making all thinking a moot point.
While there could be a waterfall selloff here into the close as of 3:20 PM selling is contained and moderate. Many of the new leadership stocks are flat to green. So we have to respect that change in character.
Right now it appears the market is buying the LTRO game theory. While the ECB cannot stand directly behind sovereign debt (it cannot buy it directly, must buy it on the secondary market), it can stand directly behind the banks. Which it is doing. Much like the Fed in 2008/2009 it is accepting just about anything as collateral, even Grandma’s scrapbooks ala Bernanke 4 years ago. So the ECB stands behind the banks, and the banks can buy debt – at least 3 year or less durations. And if a 3 year LTRO is so successful what is to stop the ECB from pulling out a 5 year, a 7 year, or a 10 year. It’s all one big ponzi at this point anyhow. Perception is reality….until reality matters.
Accompany that with the QE drumbeat and we again, have to respect it. One must remember QE2 was hinted at, in Jackson Hole, WY in Aug 2010 – the market rallied for 2 months up to and thru the actual announcement…. then rallied another 4+ months. Aside from the March 2009 oversold rally it was the strongest period we’ve seen the past 5+ years. Of course we know once QE ended all those gains were vaporized but “eventually” is a long time from “here”. QE is ephemeral in many ways, but it does change the psychology as investors “believe” they have moral hazard fully behind them. So one needs to wonder now if this rally that begin late December is the “pre QE” rally ala what we saw in late summer/early fall 2010.
Maybe, maybe not – but the charts are firming up in both indexes and a lot of once broken stocks. We cannot predict the future but we can respect the change in the charts… until they change once more in the other direction.
That said, as a contrarian, when folks like me (i.e. “doubters”) start to type words like this, maybe one should be ever more cautious. 
Disclosure Notice
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
