Ming Lo Investing

Marketwatch: Santa Rally Questionable; S&P Facing Upward Resistance

Posted by admin on December 16, 2011  |  No Comments

So the Europeans disappointed, again.  It was likely that they wouldn’t give the market everything it wanted, but there was hope that there would be enough for a Santa Claus rally.  That rally is looking less probably – more hopium (hope + opium), as the pundits would call it.  Let’s take a closer look.

As the Europeans approached their major summit on the December 9th, markets were hopeful and were sitting at the 1265 level on the S&P, essentially the 200-day moving average.  On the 9th, Mario Draghi, the newly annointed ECB chief, came and said he couldn’t understand why the market thought there would be Eurobonds.  The week before he had hinted at some form of stronger action, so some in the market weren’t too happy with his proclamation.  The market dropped to about the 1230 range.  The next day, on the 9th, the ECB announced some liquidity actions and the Euro summit closed with a framework for greater integration.  It was less than the market wanted, and the S&P fell to the 1205 range.  In the process, the market crossed the 50 day moving average, which for the instant, has become upward resistance.

For me, it’s not clear yet which way the market will go.  I’m somewhat downward biased, but I’m also waiting for a clearer signal.  There’s almost no upward catalysts expected until the New Year, and possible downgrades by the credit agencies.  Gold has been taking a beating lately, which usually means that someone is selling to be more liquid.  That could be a central bank or it could be European banks in need of dollars.  That wouldn’t really be a good signal either, though it depends on whether there is more selling.

All in all, hard to tell – for me at least.  It’s wait and see for me.

Marketwatch: Waiting for the Politicians, Again

Posted by admin on December 6, 2011  |  No Comments

So Merkozy, as Merkel and Sarkozy are now so fondly called, have agreed on the outline of greater European integration.  That’s a step forward, but the only things that matter to the market are (1) whether the ECB will buy bonds; and (2) what the size of a bailout package might be – either through the European Financial Stability Facility (EFSF), or through some convoluted IMF mechanism.  So this Friday, after a meeting of European ministers, we should find out what the reaction of the Europeans is to the Merkozy proposal.  The key is after – what the ECB will do.  At the moment, the market is bullish with hope.  If the ECB doesn’t move enough after Friday, or if the ECB comes out with a process that the market thinks will take too long to execute, the market will decline.  The ECB has hinted at stronger action, so expectations are high.

Marketwatch: Now What?

Posted by admin on December 2, 2011  |  No Comments

The market bounced off the 1150 range that I mentioned in my last post.  Admittedly, much faster and sharper than I thought.  In only a week we are almost a hundred points higher, at 1244.58 as of Thursday, December 1, 2011 close.  All this driven by the hope of progress in Europe, good economic data in the US, China easing its monetary policy, and major central banks working together to ease dollar liquidity problems (this was the big surprise).

Unfortunately, this means we may not have much further to go.  The 200-day is at 1260.75, which we could easily touch on Friday, December 2, 2011, especially if the jobs report is decent.  Above that, prior resistance (and very substantial resistance) is at 1287.15, and I find it hard to believe we will cross this line.  So somewhere between 1260 and 1287 we are likely to fizzle.  Also likely because a sharp, fast rise can’t be sustained.

In terms of the macro events, the main focus now is the meeting of European leaders on December 9, 2011.  Merkel is expected to press for greater fiscal integration of the EU.  The hope is that if this occurs, the ECB may be willing to step in and take more action.  We must remember that the Germans have, so far, stated strong opposition to more aggressive action on the part of the ECB.  Whether this is political posturing (stated so that greater fiscal controls are achieved before the ECB takes more action) or whether its a hard line in the sand is hard to say.  The hope is that with greater fiscal control at the European Union level, this will solve the moral hazard problem – mainly, that if the ECB financed the big spenders, the big spenders have no incentive to pay the ECB once the money has been delivered; they can continue to be undisciplined, because the ECB will be forced to save them or see the Euro fall apart.  Once the moral hazard problem is taken care of, the ECB can step in and lend more, perhaps by first lending to the IMF and then having the IMF lend to the countries in need of support.  This is, by the way, because the ECB cannot lend directly to individual countries.  If it sounds convoluted, it is.

I’m inclined to think the market will hold or perhaps go up for a few days, at least until the details of the European plan are released.  Likely that’s December 9th, but details could be leaked beforehand.  Likely, the most we will get is more European integration.  What the market really wants is printing money – the issuance of Eurobonds, which is not likely to be promised next week.  The ECB has hinted that they would do more if there greater fiscal integration, but they have not said what exactly, and I’m skeptical whether any announcement about Eurobonds would come next week.  I thinks the Germans will want to solidify the fiscal integration before moving on to printing money.

So most likely, next week’s announcements from the ECB will be a “sell the news” event.

By the way, the reason I go through this is to determine a “baseline” of the most likely outcome and determine the course of action if the “most likely” outcome occurs.  But the “baseline” is also helpful because it tells me what to do if actual events deviate from the expectation.  So if we get Eurobonds, the market will go crazy upward.  If we don’t even get more fiscal integration, or very limited (for example, if Italy’s status remains unclear), then expend bond markets to press Italy and for US equities to decline.