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ON THE MARKET -- Italy's Austerity Gambit

Friday 11-11-2011


Dr. John L. Faessel


Commentary and Insights


Quote of the day

“In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived. Europe is in a debt spiral brought about by spendthrift, overweening and inefficient governments.”

~ WSJ ~  



The McClellan Oscillator is in Neutral at Plus 19


Euro Bond Spreads Back-Off Record Highs


Italian 10 year BTP yields drop again to 6.57% from the 7.483% of (2) days ago.


The markets technical picture continues to looks favorable in spite of the chaotic Euro debt crisis. The McClellan Oscillator posted a yearly high of an extreme OVERBOUGHT plus 285 on 10/27/2011 and has since backed off to a NEUTRAL plus 19 as the breakout was digested with some constructive back-and- fill. We remain in the “handle” of the classic cup-and-handle” above the breakout pivot.


The S& P 500 futures are up 12 points at this writing on the back of an Italian “austerity” plan. Ha!


The breakout (now support) pivot number of (SPX) 1232 is important.


Key News from Mess Central:

Italy's Senate passes the financial stability law - a package of budget savings and economic reforms - by a vote of 156-12. The bill is expected to pass the lower house tomorrow, at which point Berlusconi has promised to resign as PM. Italian shares +1.6%.  Italian 10 year BTP yields drop a few more ticks to 6.57%. They were 7.483% of (2) days ago.


The austerity package foresees 59.8bn Euros in savings from a mixture of spending cuts and tax rises, with the aim of balancing the budget by 2014.


Question of the day is, will the Italian package get signed into law and will they implement it?


Mario Monti, who is set to lead the new government of technocrats, once described the Italian economy as a case of "self-inflicted strangulation." Government debt is 120% of GDP, making Italy the world's third largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000. Italian women have on average 1.2 children, putting the country's birth rate at 207th out of 221 countries.


From a simply demographic analysis it’s a doomsday scenario as a fifth of Italy's 60 million people are 65 or older and make increasingly expensive claims on state-paid pensions and other benefits.


Short term price resistance in the S&P 500 (SPX) is at 1249, then at (SPX) 1251.

Declining tops resistance is at (SPX) 1270.

Tuesdays top tick resistance is at (SPX) 1277. The 200-day moving average resistance is at 1272.

The high post of the 3-month consolidation occurred on October 28th at 1293.



Short term price support in the S&P 500 (SPX) is at 1235 and at 1226.

The “daily” ascending lows trendline support is at1230

2-weeks ago low tick of the cycle was at 1197 and 1192.

The 50- moving average support is at (SPX) 1199.59

The August 8th lows were 1101. The “clean-out” lows were put in on 10/4/2011 at (SPX) 1074.


The (SPX) closed on Friday at 1239.70.


Yesterday’s key indicators and metrics:


         McClellan Oscillator is in NUTRAL @ plus 19   

·                 3-month $ LIBOR at 0.457

·                 Euro – 1.3582

·                 US Dollar Index – 77.97

·                 VIX – 32.81

·                 Gold (COMEX) $1759.6

·                 Brent Crude $114.03

·                 The Treasury 10-year yield 2.06%

·                 CBOE Put / Call Volume Ratio – 1.16

·                 Crude oil (NYMEX) $94.26

·                 Swiss Franc – 1.1024

·                 Aussie Dollar – 1.0085

·                 Japanese Yen –12886

·                 Copper – 3.3740

·                 Silver (COMEX) 34.084

·                 Canadian Dollar – 0.9803


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