Markets Rethink Spain And Italy

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Includes: DBC, FXE, GDX, GLD, JJCTF, USO, UUP
by: David Fry

Most financial broadcasters were excited about prospects for a substantial rally last night as the Spanish bailout was announced. But, then there are those pesky details and fallout to be dealt with. Will current Spanish sovereign debt be subordinate to freshly issued eurozone loans? It seems that's likely. For most of the trading day Monday, Italian stocks (Fiat, Intesa & others) were halted in trading as contagion worries persisted. Italy will want a similar, if not larger deal. The Italian MIB Index was down 2.80%. The leftists in Greece have pounced on the bailout as a sign they can renegotiate their deal. Indeed, Syriza the hard left party vying for control in Sunday's election has taken the lead in polls which is a poor sign for the durability of previous agreements. The Germans must be none too happy how events are unfolding. They're doing everything they can to keep eurozone together without having to finance the bulk of it, and, they're not willing to be ignored over austerity.

Anyway, markets rallied early as expected but then sellers hit the sell button as these bailout rumors and plans are becoming tiresome. Investors want to see eurozone officials confront reality and cut deals that address the systemic problems-or, no more tip-toeing around period.

Investors were caught leaning the wrong way from last week's rally to the opening bell Monday. Stocks were down sharply and selling was universal, so there isn't any reason to single out leaders. Gold (NYSEARCA:GLD) was modestly higher in "risk-off" mode while Gold stocks (NYSEARCA:GDX) fell because…well, because they're just stocks in the sell program basket. Most commodities -- DBC, USO and JJC -- were lower. The dollar (NYSEARCA:UUP) reversed some selling and rallied as the euro (NYSEARCA:FXE) weakened.

Not so cheery news came from the Fed which indicated U.S. family net worth had fallen to levels (40% lower) than those in the early 1990s. This is the kind of news that will bite hard on consumer sentiment and they're living it.

Volume on Monday was about average for the period while breadth per the WSJ was quite negative. The roller coaster ride in breadth is quite remarkable but distribution is still dominant.

The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

Well, that Spain deal went over like a lead balloon ... or more like some bad tapas. No doubt EU leaders are huddling up to find another more dramatic and believable move. There are some rumors the Germans are merely biding their time waiting to bail out Europe on its own terms. That could be quite painful.

The more important economic news won't be present until Retail Sales (Wednesday); Jobless Claims (Thursday); Empire State Manufacturing Survey, Industrial Production, Consumer Sentiment and, of course, quadwitching (Friday). Then there will be the Greek election Sunday and a Fed meeting the following week. These later events will show us where the rubber meets the road.

Let's see what happens.

Disclosure: I am long EFZ, VT, MGV, BND, BSV, VGT, VWO, VNO, IAU, DJCI, DJP, VMBS, VIG, ILF, EWA, IEV, EWC, EWJ, EWG, EWU.