Volatility Is Back Over Renewed Uncertainty In Europe

That Was Fun

Hold on to your seats, it seems the S&P’s intraday whipsawing volatility may be back. And we know the source of volatility: uncertainty.

The collective someone, somewhere is picking up on some new or remembered fundamental signals that lack clarity around something. Could I be anymore vague?

But that’s the point. Just as we don’t know exactly what drove the market to trade with an upward bias for the last nearly two weeks up until yesterday with all thoughts of the previous month’s tremendous uncertainty seemingly gone, we won’t know exactly what caused the S&P to slide 8 points into the red for a few minutes after being up 13 points near the open.

And while it is a positive for the S&P that it managed to pare that loss in half by the close, the reemergence of volatility is not so positive for just as stability breeds stability, volatility breeds volatility.

What’s there to be Uncertain About?

I remain convinced that it is more than a coincidence that the S&P stopped its freefall the day after the “details” around the European Financial Stability Facility were released. Remember that investors were without specifics on how more than half of the 750 billion euro rescue package was to be raised since its initial announcement in early May. All investors knew was that the funds would be raised on the guarantee of the very countries that could need, in theory, to draw a loan from the emergency vehicle.

While the details cleared up little in my view, it seems more like a pipe dream, sort of like the long-forgotten PPIP, at least a bit more clarity was provided. Or perhaps investors were just pleased that it was remembered unlike PPIP and all of those “toxic assets” still sitting out there somewhere. Either way, very nearly simultaneous to its announcement, the euro strengthened relative to the dollar and the S&P moved up nicely. Each seemed to “collect” itself rather well.

Well the euro had a somewhat volatile trading session yesterday too and this leads me to believe that the uncertainty is around Europe, surprise, surprise. Apparently, one report claimed that European banks may need to raise funds to recapitalize after the “stress tests” are complete and in particular two Spanish banks due to losses on sovereign debt holdings and other credit losses. In addition, and I know that no one else is focused on this but returning to the EFSF, it still needs to obtain that triple A status and to have more than the single shareholder found in the nation of Luxembourg.

While I wish all of this would clear up soon and provide investors with the certainty they desire, the downward trend in this ETF proxy for the euro says we can rest assured that the euro’s decline will be accompanied by uncertainty around the continued unfolding of the sovereign-debt crisis.

(Please go to www.peaktheories.com for the chart.)

Stocks, Treasurys, and Gold Do the Same Dance Again

Apparently John Tesch should not be talking about gold. The very trading day after he put in his two cents, it tumbled to $1,232 before recovering a bit. But so too did the S&P fall while the 10-year yield moved up slightly. Again, when the music stops, someone’s going to be without a chair.

It’s Better to Be Lucky than Smart

Writing “This ship is going down” yesterday about the S&P 500 while declaring that the broadening top or megaphone structure remained a possibility after a 4-day highest high and in the face of a market that seemed to want to go up was brazen at best. The fact that the market dropped 4 yesterday is nothing but dumb luck, if you can call the S&P going down lucky.

It’s Better to Be Lucky than Smart

Writing “This ship is going down” yesterday about the S&P 500 while declaring that the broadening top or megaphone structure remained a possibility after a 4-day highest high and in the face of a market that seemed to want to go up was brazen at best. The fact that the market dropped 4 yesterday is nothing but dumb luck, if you can call the S&P going down lucky.

This being said, I see these charts as I did when writing yesterday’s piece, and thus what I wrote above applies to the following as well. The truth is though that I continue to have a difficult time seeing how “the ship” can remain afloat when looking at the 2- and the 3-year charts of the S&P 500. The weighting of the index’s trend is clearly down. Also, just for the trend to change to flat, not up, but flat, the S&P must sail to 1,300 in the 2- year and 1,560 in the 3-year.

And there below is the potential broadening top or “megaphone” negative reversal pattern. I drew it on the 1-year while leaving the 6-month to shine in its own unspeakable light. The broadening top remains valid with yesterday’s small decline and will remain valid so long as the index does not close above 1,118. Its technical target calls for a decline to about 950 or the height of the structure dropped from its likely bottom.

(Please go to www.peaktheories.com for the charts.)

On the other hand, there remains a distinct possibility of the S&P 500 moving higher in the near-term or carving out a 50% retrace of the recent drop. This would bring the index to about the 50 DMA at 1,140.

Regardless of the index’s near-term moves, I continue to believe that the combined message of all S&P 500 charts is singular: we are in the worst bear market of our collective lifetime.

I am going to be skipping the portfolio talk indefinitely, thank you for your patience with PTR’s evolution, exciting things are happening and I appreciate your being a part of it.

And, as always, thank you for taking the time to catch up on my thinking.

Disclosure: Disclosure: No position.