Borrowing rates continue to rise ominously with Italy’s benchmark 10-year bond yield back over 7% and Spain’s creeping up to 6.22%. France, considered one of Europe’s core leaders and beacons of light, has seen its yield drift up to 3.6%. Countries in deep debt need growth to dig out of their hole, and the lackluster growth figures present a new set of problems to countries like Greece and Italy. New leaders in both countries are moving quickly to shore up new economic reform packages and build consensus. Germany looms in the background skeptical of its blood oath with the rest of Europe, and many officials in the country want to create contingencies for leaving the Euro zone.
A few months ago it was Rotten Corn Beef and Cabbage! Last week it was “For all the Cannolis!” Now, we have spoiled paella.
This is starting to get old as the European headlines never seem to go away. Unfortunately these problems in Europe will be with us for years; there is no quick fix, especially with lackluster growth out today. The question is, how will the market handle each of these historic problems as they unfold? Today the emphasis is Spain. Their yields are now at historic Euro highs!
On a macro basis this wedge pattern of indecision is still developing. There has been a series of lower highs and higher lows over the past week, and today we will see whether we put in another higher low or break down. The Futures are opening lower into that lower end of the range so it will be very important to see how we handle this area.
In order to create another higher low to keep this pattern intact, we must hold above the 1226-1227 area with a spot to watch at the 1232-1238 area on the S&P. If we move and hold below that area and this wedge will be leaning more to the downside. 1215 is a big spot as it held a few weeks back. If we break below this, I do think new highs for the 4th quarter start coming off the table. The Line in the sand has moved up with the 50day moving average which now stands around 1202.
On days like today, it becomes a reality check again for your time frame commitment. Look to see if anything can go green and we can get some sector leadership to keep bullish composure intact. If not, lighten up on positions again and it’s back to the drawing board.
The first and second parts of a move are the easiest to predict, as shorts are trapped and things looks cheap. The 3rd and 4th part get tricky as most shorts have already been squeezed, and new money grabbed cheaper prices. You usually need some good news, which has been hard to come by, or at least no bad news. With even French yields creeping higher, next week it could be “for all the croissants”.
*DISCLOSURES: Scott Redler is long SPY, OIH, GLD, DAN, WLT, GOOG.