Recent weeks have been a swing trader's paradise. If you went long on the big dips, and shorted every rally, you'd be sitting on some hefty profits at this point. This hasn't been exclusive to the stock market either - even the massive liquidity in the forex market hasn't prevented volatility. No currency has been spared from the pain except the US dollar, which has become the lone safe haven in a sea of trouble.
Mix in the intensifying financial drama in the Eurozone with the looming supercomittee decision and US GDP data set for Tuesday among other big releases, and we've got a recipe for a very volatile and meaningful week in terms of direction. The VIX (the volatility/fear index) should probably do quite well. You can go long the 2x leveraged VIX ETF (NASDAQ:TVIX), which is an immensely volatile instrument for only the craziest of traders, or you can go with the the less crazy ones, Velocityshares VIX futures (NYSEARCA:VXX) to play long volatility or the inverse ETF (NASDAQ:XIV) to short. Remember, volatility can be positive if stocks are rocketing upwards too fast. It's not the same as a short position, although it tends be due to the speed of selling relative to the speed of buying in stocks.
Anyway, here are 3 big events that should set us up for the next big move in the markets.
1.) The Bond Market Will Make or Break European Sentiment
The bond market has always been the "gravity" of the financial world, but we've all been paying attention to the comparatively meaningless gyrations in public company values. The bond market is what will make or break Europe. Someone has to keep the money flowing, or the train crashes. Right now, the only institution crazy enough to be on the long side of risky Eurozone debt seems to be the ECB, which is single handedly keeping the financial markets afloat with bond purchases.
To get a visual of what's going on, take a look at how yields have behaved for Italian, Spanish, French, and German 5-years.
click to enlarge
What's the odd one out of the pack? Here's a hint - they've got a AAA credit rating and are probably about to lose it.
That's right - France. The bond markets have suddenly woken up to this nation's correlation to the fate of Italy, which have caused interest rates on its 5-years to explode. The worst part is that France is not one of the PIIGS - this is something new. They were supposed to be one of the "good" ones. That whole contagion thing everyone was talking about it starting to scare the hell out of France's debt market. Will this be the straw that breaks the camel's back, or will this be the turning point towards a fresh delay of the inevitable?
If you want to bet long or short on the fate of France, you can simply use BNP Paribas SA (OTCQX:BNPQY) since it's basically a mini-France with all the Italian debt it's carrying.
2.) The US Super Committee Will Drive American Sentiment
With every other headline talking about Draghi and the ECB slipping on or avoiding banana peels and the breaks and retreats in sovereign debt yields, we've seemingly forgotten that we (the US) are the king of debtor nations. It's true that our debt-to-GDP is quite far removed from the likes of Greece or Italy, but we're in way over our heads.
The super committee is due to have solutions by midnight on Wednesday. As always, bipartisanship has been getting in the way, but if they manage a solution it could be quite beneficial to a market looking for some good news. Pressure on risk assets might finally ease up a bit, and send US stocks higher.
3.) The GDP data will give us more clues on the recovery
There are two extremely important figures being released this week. There is US Q3 GDP due on Tuesday morning, and there is German Q3 GDP due on Thursday before the European open (when us Americans are asleep). For the US, we're thinking somewhere around 2.5% growth annualized. For Germany, a more pessimistic .5% or so.
These numbers are critical because it will be a good way to figure out the direction of the general economy. The United States has been posting some pretty good numbers, and if we get a strong GDP number to confirm it, I think we're set for a significant relief rally in the stock market. Germany's GDP is especially important because it will be a sign as to whether or not the Eurozone will be able to sustain itself (Germany has been funding the ECB by a disproportionate amount, much to the dismay of its citizens).
On top of GDP, we also have durable goods numbers coming in from October (for the United States) which will give more insights into big-ticket purchases in the country. If we are showing signs of another recession, governments with shrinking tax revenues are going to be in deep trouble. If we're recovering, increased tax revenue should significantly alleviate the problems we've been having. A few little variables can be the difference between a severe downturn and a big recovery at this time because we're at the edge of a knife.