John Mylant's  Instablog

The financial crisis in Cyprus has been in the news for just over a week now and it did have an adverse effect on the markets earlier this week. The markets dropped on Tuesday in a reactionary move to Cyprus and we could see more of this in the future. Let's explore some solutions for Cyprus and I will give you my observations as to how I believe it could continue to affect our markets.

Russia as a Possible Equation in the Solution

After the population nearly rose up in revolt at the idea of taking their money, the parliament of Cyprus rejected the idea of seizing money from people's bank accounts. Now they need to explore a new way to protect the nation from financial ruin. Officials feared that confiscating money from larger deposits would scare away large depositors and if the money was pulled out quickly it could put a huge strain on the island's financial system and this would exacerbate the problem.

Political leaders have to raise $5.8 billion (in euros) in order to qualify for $10 billion (in euros) as part of a rescue loan.

Russia came up as a possible alternative. Cyprus will try to raise as much money as a can domestically then possibly have its finance minister asked Moscow for support in the form of an extension on an existing loan. This is a real alternative being explored right now.

Because of all the financial transactions with Greece that went bad, Cyprus banks are drawing emergency support from the ECB presently but this is not an indefinite solution. The ECB has pressured the banks of Cyprus stating that aid would be cut off if a bailout deal was not taking care of soon.

Is Cyprus a Possible Precedent for Other Governments?

I'm not sure about other countries but I do know that here in America it is not likely that something like this could happen. Here is a direct quote from FDIC spokesperson David Barr:

"The FDIC' don't you know you walk with Google on the views core mission is to create stability in the banking system and to protect depositors' savings. During the current economic crisis, consumers have seen firsthand how the FDIC protects their money by swiftly making deposits available when a bank is closed. In the FDIC's 80-year history, not a single depositor has ever lost a penny of insured money as a result of a bank failure. Our proven track record has helped prevent bank runs during some very difficult economic times."

Back in the Great Depression, the FDIC started to ensure deposits of up to $100,000 but recently that was changed to $250,000 after the passage of Dodd-Frank. Well what would happen if the FDIC ran out of money? If insurance money would run out, the Federal Reserve Bank would step in and back up the FDIC.

Market Effects

In the bigger picture, the entire euro zone crisis is possibly at the forefront of influencing the markets again. Looking at all possibilities, what would happen if Cyprus could not resolve its present financial problems? Some have said there's a possibility it may have to leave the euro zone. I do not believe this is the case but speculation loves to rear its head. I think this is just talk, not something that will happen. Even though Cyprus is a small company and only about .2% of the euro zone GDP, the symbolism of not being able to solve its debt crisis would have ramifications throughout the continent.

So how should investors react to Cyprus? Personally, I believe that Russia will step in and help the country because of the financial ties that the two countries have with each other. Presently I would describe the problems in Cyprus as a "bearish gnat" that may hang around the markets and attempt to throw cold water on the mild bullish run the markets are presently experiencing. Could Cyprus be a major bullish factor on our markets? Anything is possible, but I do not believe it is probable. If finding a solution drags out, I believe our markets would react and possibly turn neutral in movement to the point where investors observe a trading channel taking place. That's all I would expect from the problems in Cyprus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Technically Speaking

RSI- the RSI indicator continues to look very strong, as the low point has barely moved below the 50 line. Presently, as it moves up it looks like it is going to move parallel to the 70 which is the over bought indicator. But so far it is showing signs of very strong bullish moves.(click to enlarge)

Bollinger Bands- the SPY continues the how do the upper band and it is hard to conceive how the trend could get any stronger than it is. In fact, it looks like the SPY is on the third leg swing up and I don't think it will be as long as the second leg but I still believe it's got a couple weeks to move. There are no signs of slowdown.

MACD- the MACD supports the RSI indicator, you'll notice that the low point is well above the zero line that signals bearish territory. Presently, it looks like it is moving up but may also have reached a high point. Like the RSI indicator it is supporting very bullish moves still.

Current Events

Stocks have soared in 2013, with the Dow (.DJI) climbing almost 11 percent to hit a series of new all-time highs while the S&P 500 (.SPX) has jumped 9.4 percent, falling just short of its all-time closing high after rising for 10 of the past 11 weeks. And yet, analysts for the most part see equities as fairly cheap.

Questions remain about the potential impact of U.S. budget negotiations or the Federal Reserve's plans in continuing its massive monetary stimulus. The Fed meets next week.

Taken on its own, analysts see potential for more gains in the U.S. stock market, based on metrics like earnings prospects and valuation. The forward 12-month price-to-earnings ratio for the S&P 500 is currently 13.5, which is about 9 percent less than the October 2007 ratio of 14.8 when the S&P last hit a record.

The S&P 500 is also trading well below its intrinsic value, another metric of earnings-based valuation that estimates where a security should trade, based on its expected growth trajectory over the next decade or more.

The index is seen as having a price to intrinsic value ratio of 0.85, according to Thomson Reuters StarMine, which means it would have to rise 15 percent to be in line with its earnings growth trajectory. More than two-thirds of companies are below their intrinsic value, including some of the biggest.

While the stock market's two previous peaks were followed by recessions stemming from the bursting of the dot-com bubble in 2000 and the 2008 credit crisis, there is no apparent equivalent today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Yesterday the markets started off low then moved sideways but as the day progressed I started the climb and ended on a positive note.

Before the markets open it looks like the bullish rise is going to continue, and as closes in on that record I will be interested to see if momentum is able to push it through and keep it going with all the bearish news facing us.

It is also good news from China that the new government will stay focused on consumer led growth as a way to keep the economy moving, the new government put out its 2013 spending plan which the markets have willingly embraced.

New growth in February will be shown in the US to have continued, so the news looks pretty good for the economy still. Looks like we might have a neutral to bullish day today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.