Which Is Stronger - Euro Collapse or Fed Money Pumps to Wall Street?

Dec.20.10 | About: iShares MSCI (EEM)

This week’s action can be summated in a single question: Which is stronger, the Euro collapse or the Fed’s Permanent Open Market Operations (POMOs) aka money pumps to Wall Street?

These are the two primary forces at work on the markets today. Thus, this week’s action will be determined by one of the two:

1) The Euro (the bearish influence)

2) Light volume/ the Fed’s ongoing POMOs (the bullish influence)

Regarding #1, the European currency has just taken out support at 132. It’s now closing in on its rising trendline of the last six months. As I write, this line is crossing 130, which also coincides with the low for the first leg down in this recent collapse:

gpc 12-20-1

As you can see, a break here would herald a serious decline as the Euro will have taken out its trendline and its recent low. This would set the stage for a drop to 126 or so.

If this happens this week, the US Dollar will rally strongly (the Euro accounts for over 50% of the US Dollar index). This in turn will take down commodities (including Gold) as well as stocks.

This is the bearish case for this week. We get additional support for this outcome from several market leaders, which all look to be topping or to have already topped. They are …

Emerging markets:

gpc 12-20-2


gpc 12-20-3

The Baltic Dry Index:

gpc 12-20-4

While these leading indicators suggest stocks are due for a serious correction of sorts, one has to admit that thus far stocks have held up surprisingly well despite the Euro’s first leg down.

gpc 12-20-5

This is largely due to the second factor outlined above: the Fed’s ongoing POMO efforts combined with the light volume, the latter of which will be a key issue this week.

On that note, this week we have two POMOs today, two again tomorrow, and one on Wednesday this week. The total Fed money pump will be in the ballpark of $25-30 billion.

Given that market volume will be extremely low due to most of Wall Street being on holiday this week, we DO have the potential for a serious ramp here.

Again, it all boils down to the following question:

Which is stronger, the Euro collapse or the Fed’s Permanent Open Market Operations (POMOs) aka money pumps to Wall Street?

Any time before last week, and the answer would have been the Fed’s POMOs. However, we did have four POMOs last week and stocks barely managed to close in the black:

gpc 12-22-6

So at this point it’s a bit of a toss up. In general it’s best not to make a bold move this week given the light volume. But if the Euro starts collapsing in a meaningful way … LOOK OUT BELOW!