Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
U.S. investors return from the long weekend to find futures up and shell games continuing across the pond. What has been interesting during almost the entire month of May is despite a market that has stunk during normal hours, a lot of buying by ‘someone’ has been happening in the thinly trading futures market. This has led to a lot of frustration for those seeking a bottom who wish to find a ‘wash out morning’ which can never happen with that persistent bid. Anyhow, looking back at a chart I posted late last week not much changed Thursday and Friday, nor will today barring a massive rally.
The S&P 500 has yet to claim even a 38.2% retracement (Fibonacci talk) of the drop from recent peaks, which would be near 1340. This appears to be an area those of a bearish bent are waiting to make their stand. So the chart is a few days old but the roadmap is not any different. Until (if and when) we get nearer to 1340 we remain in the white noise area, waiting for more interesting levels to surface. Very oversold conditions are being worked off, and a ‘bear flag’ appears to be forming. The longer the market stays under this 1340-1350 level the more bearish it would appear to be. That said, massive central bank intervention – which can be announced at any second of any day – makes all charts moot points.
Over in Europe some of the news is getting downright silly. Greece is recapitalizing their banks with … what money? Spain is trying to get around collateral rules by proposing a shell game that would have made a major Las Vegas magician act proud.
- Spain may recapitalize Bankia with Spanish government bonds in return for shares in the bank which last week asked for rescue funding of 19 billion euros ($24 billion), a government source said on Sunday. Bankia could use the sovereign paper as collateral to get cash from the European Central Bank, forcing the ECB to get involved with restructuring Spain’s banking sector.
- “The biggest problem here is that the ECB could object. That’s a legal issue, but technically it is possible,” said Jose Carlos Diez, economist at Intermoney Valores.
Whatever the shell game, the key is Spanish yields are approaching mid 6%s, which means the market is not buying the shells. So why are futures up? Who knows – fatigue, hopes for intervention, technical reasons, QE3 announcement in 3 weeks, Chinese easing sooner rather than later, etc etc. We are not seeing any glee in the U.S. bond market or currency which are the more important tells. One could argue the U.S. dollar has indeed become parabolic – which is a bit scary.
Back in the U.S. some economic news will provide a “respite” from Europe – mainly Thursday and Friday with the ADP employment data/Chicago PMI (Thu) and monthly jobs data/ISM manufacturing (Fri). Chinese PMI also will be released, but at this point one does not know whether to root for bad (more intervention!) or good.
Bottom line, keep an eye on the bond and currencies market – the equity markets seem a sideshow for now as we play out the latest iteration of “waiting for intervention”. That said, a reminder than any +1.7% move on substantial volume this week would trigger an IBD “Follow Through Day” as it would come in the 4 to 10 day window from last Monday’s “Day 1” of a rally attempt.
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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
