This is a market only a mother could love. Let me line it up for you.
Greece is about to default (they will default eventually), Italy, Portugal, and Spain will likely come next, in that order, China is building infrastructure no one is using and the credit crisis that is about to take place in Europe with banks unwilling to lend to each other is going to put a wrench in the funding of that system unless the Chinese government lends money to developers themselves (possible but not likely). The macro situation in other terms is hellishly bad.
The sentiment is terrible as well, just look at the news flow. Every single day now we have finance ministers lying to us, lying to each other, and lying to themselves about what the reality of the situation is in Europe and what they plan to do about it. Listening to a finance minister say that his country won’t default or his banks are in good position is like your 23 year old boyfriend saying “please trust me, I didn’t cheat on you”, the fact that they even said it means they’re lying.
Markets can handle good news, they can handle bad news, but they panic when they can’t trust anyone to give them the facts. Right now that’s where we are, and the charts reflect that. The market is undergoing wild swings within this bear flag pattern. Big distribution days are coming on higher volume than up days. The number of one way days within this range is staggering, it’s either all buying or all selling. Gaps of 2% take place daily and markets are turning on a dime. This is not indicative of a healthy market.
The bears had their shot Monday to complete the pattern and start the next leg down which, if my measured technical calculation is right, should take us to $98 on the SPY. The bears blew it though and it seemed as if mid-day no one had anything left to sell, for now. Remember, from failed moves come fast moves. The bulls took control late in the trading session and were getting a bit of follow through yesterday.
I still think we complete the pattern eventually and head south, but you’ve got to look objectively at the price action. If the pattern is not completed soon, you’ll have a bunch of trapped shorts and some gasoline for a big squeeze if somehow our governments come up with a huge intervention or plan to save the eurozone and or Chinese demand for raw materials.
At around 1PM Monday afternoon I was looking at the EUR/USD and noticed that technically it was massively oversold. I posted this tweet.
It’s all about the euro right now as the worst case scenario on the board is that we are facing a European monetary union breakup. The euro summarily bounced hard right after I said that and continued to do so yesterday. The trend is definitely still down, but the currency needs to work off its oversold status before it heads further south. These oscillators and indicators are not magic and should not be solely relied upon, but they are there to manage risk, you don’t short a sub 5 RSI asset, you just don’t.
On top of all this macro doom and gloom, which is rightfully placed, there are at least a dozen amazing companies I would love to own right now if the market got healthy. We have such a bifurcated economic situation in every sense. There is so much innovation taking place in tech and so many good retail brands creating new markets. These companies could not care less about what’s taking place in Europe, you think Apple (AAPL) is going to sell fewer iPads because Greece can’t pay its bills? These companies will continue to grow and perform, but as long as the macro environment and threat of systemic panic stays over the market, there’s no sense in owning them, the odds are against you.
It’s all about the euro, don’t forget that. Pay attention to the chart and listen to how loud the macro noise is, but please don’t listen to what anyone is saying, they are all lies on both sides.
To end, read this post from Joe Fahmy if you haven’t already, it sums up my feelings perfectly (save for the fact that I do engage in targeted short selling).
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