Wednesday, May 30, 2012

Maintaining a perspective

For the first time in 2012 the market decided to react to news out of the Euro zone the way it did in the second half of 2011.  And while it was an ugly day the technical perspective did not significantly change from last week:

(click on chart for larger image)

The green arrow shows today's price action.  The S&P finds itself in an ascending channel also known as a bear flag which usually resolves itself to the downside.  The most important aspect of the chart is that resistance from the February and March lows (brown dashed line) has held which is another bearish indicator.

So, did the market nosedive on Spanish Ten Year yields climbing to over 6.5% or was it the latest Greek opinion poll that showed the anti austerity Syriza Party capturing 30% of the Greek vote in the upcoming election?  The answer is both.  As I stated in my commentary on Sunday we will get a market reaction from every Greek opinion poll from now to the election.  But more importantly, the market has refocused on periphery sovereign yields as it did in the last half of next year.  At this point, the Spanish 10 Year will be closely watched and as it approaches 7%.  And the Italian 10 Year will also be watched as it is approached 6% today. 

Seven Percent is the rate where Greece, Portugal and Ireland had to turn to the EU for a bailout.  The problem this time around is the EU doesn't have enough money to bail out Spain.

But we're still not seeing the same level of fear in the market as we did last year (yet):

The Three Month T-Bill yield has dropped 15 basis points from Friday's close but is nowhere near signalling the fear exhibited last year (the two blue vertical lines) and the Italian Bond Index, while closing in on support is still hanging in there. 

If anyone needs further explanation on the last two charts my commentary of 5/25 explains in detail how to read them.

We'll see what tomorrow brings.