More of the Same or Is This Time Different

Stock futures are up sharply this morning on news that the US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Japan, and Switzerland announced a coordinated plan to increase availability to dollar liquidity for financial institutions.  The action takes the immediate pressure off of European banks just as they were showing signs of an increasing liquidity crises.  While the short-term impact is certainly positive, the longer term effects are unknown.  The current market is dependent upon government intervention for any positive movement.  That is not to say that this rally can't last for some time.  After the windfall decline over the last few weeks, we will have to wait and see whether or not the US indices can get through the levels of resistance laying before them.  The S&P will open above its 50 day moving average and the next level of resistance rests at the 200 day moving average.  That level is at 1233 just a few points above where the S&P will open. 

The December 9th meeting of European leaders lies on the horizon.  That meeting could yield a longer term solution or could bode ill for the markets if it leads to no unified action.  The markets continue to be driven by political maneuvering which makes it extremely difficult to trade this market.  It becomes a coin flip on whether or not the market is going higher or lower on any given day as technical and fundamental analysis takes a back seat to the whims of politicians.  Our portfolios are currently market neutral - waiting on some direction.  We are watching closely.

Volatility and More Volatility

Market weakness continued today with no specific catalyst.  U.S. economic news has generally been good and improving over the last several days.  However, headlines in Europe regarding their credit crisis and the growing yields on specific country bonds have created an environment of continued unease and uncertainty.  That could change at any time as the European situation is very fluid and positive headlines could move the market sharply higher.  Similarly, more negative news could quickly turn this market very ugly.  As we have discussed a number of times, basing investment decisions on the whims and conversations of politicians is a virtual coin flip.  On the U.S. front, recent news that the Congressional super committee tasked with reducing our country's deficit may have trouble (surprise) reaching a consensus provided additional nervousness over the last few days.  One of our equity positions was stopped out today, so we have liquidated it and moved to a little more defensive posture until the current weakness plays out.  Technically, the S&P broke a key level of support today so the bulls will have to make a stand soon.  We continue to believe that the market will rally into year end but it may start from lower levels than the market close today.  Time will tell and we are watching things closely.

Italy Woes

The US markets sold off hard this morning as fears about the stability of Italy reemerged.  European markets were down 2-3% as the 10 year Italian bond yields reached historic levels.  The resignation of Italian prime minister Berlusconi was shrugged off yesterday but reconsidered today.   As the 8th largest economy in the world, Italy's economic stability is much more important than Greece's.  The debacle that accompanied all things Greece will pale in comparison if Italy follows the same path.  It is a very fluid situation and one we are obviously watching very closely. 

US markets are off their lows and it will be important to see how the market closes this afternoon.  A vast majority of mutual funds and advisors have underperformed this year and will be anxious to buy any dips in the market.  This buying pressure could keep the end of the year rally intact.  1220 on the S&P is a key number to watch as a breach of this on the downside would indicate further weakness and would call into question the rally that began in early October. 

More Trouble in "Paradise"

The European issues that seemed just a few days ago to be off of the front pages is back in bold letter headlines.  The debt deal that was supposed to rescue Greece from the depths of their debt is suddenly under question as the Greeks themselves wonder if it is the best deal they can get.  The response in world markets has been as brutal as the celebration of last week.  The S&P was down 2.5% yesterday and is on pace for a similarly bad day today.    After such a large move in October, the markets were due for a pullback of some sort.  We'll see how the market closes before determining our next move.  We believe that the world powers will come to their senses and work something out in the short term to stem the tide.  We think that the market will find a base and continue its rise into the end of the year.   In the longer term, we remain concerned with all things Europe as any deal done today will have to be reforged for the problems in Italy, Portugal, Spain, Ireland, etc...  Many European countries are heading for Greece style issues and, unfortunately, their economies are much greater and any measures will likely have greater effects on the world economy.